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Well, that was an abrupt and unwelcome U-turn. A month ago India was boasting it would combat the gathering international food crisis by releasing some of its bounteous wheat stocks on world markets. Last Saturday Narendra Modi’s government downgraded its ambitions from feeding the world to just feeding India, announcing an export ban on wheat after sudden heatwaves pushed down forecast domestic production and drove up prices. With Ukrainian wheat production expected to fall by a third this year and Russia seizing Ukrainian grain and destroying its farms, the risk of the food crisis spiralling out of control just went up another notch.
There’s a pretty clear parallel between India’s volte-face on wheat and the Covid vaccine shortages last year. Its super-competitive pharma industry boasted of inoculating the world, and the government initially enjoyed the reflected soft-power glory, but New Delhi cut off exports when its own country’s needs called louder.
You see here the dangerous gap where a system of global governance ought to exist but doesn’t. When an international food or vaccine crisis hits, budding claims of abundant supply and international solidarity shrivel pretty quickly in the heat of domestic expedience. There are lots of conversations among governments about global food security — the G7 group of rich countries sprang into rhetorical action to criticise India’s export ban this week — but nothing like enough co-ordination to make it happen.
Although India’s export restrictions are more likely to be used as a calibrated management tool than outright prohibition, commodity markets weren’t happy, global wheat futures shooting higher on Monday. The situation is particularly worrying for importing nations in the Middle East and north Africa, which consume wheat in vast quantities and tend not to substitute with other grains. Egypt, the world’s biggest wheat importer, approved India as a vendor in April: it has had to seek assurances that its recent order for half a million tonnes of grain will be fulfilled.
Saleable stocks are the relevant issue here. Overall global grains production has generally been satisfactory in the past few years, according to US Department of Agriculture data. If trading were instant and costless and all food were substitutable and tradable, there wouldn’t be so much of an issue. But strong demand, and latterly some bad harvests, including in the southern US states, mean that the wheat stocks held by the biggest global exporters are at their lowest in a decade.
In India’s case, it wasn’t just bad luck with the harvest. The problem has arisen from a complex and inefficient way of distributing wheat, which is bought by a government agency, the Food Corporation of India, and sold on at subsidised rates or added to public stocks. There’s actually been plenty of wheat in the country, but mismanagement of procurement has left the FCI suddenly scrambling to meet its needs.
As ever, global problems stem from domestic ones, and frequently from political choice rather than economic inevitability. Food crises aren’t usually about an overall lack of food. They’re about the inability of the authorities to get it to where it’s needed, usually through some combination of lack of data, poor policy and neglect.
A while back I wrote about Modi saying India wasn’t allowed to export wheat to resolve the crisis because the World Trade Organization told it not to. This was a slight exaggeration on his part, but it’s true there are WTO rules against countries inefficiently subsidising farmers with high fixed prices and dumping the food cheaply abroad. Rules stopping cheap food reaching world markets may look odd, but this weekend’s news from India shows their long-term benefits. It’s not sensible to let food-importing countries become dependent on subsidised and dumped exports that can suddenly be turned off at source.
The world needs some more efficient large-scale food producers who systematically and reliably prioritise exports, and so far it doesn’t have enough. There is still distressingly little sense of a well-planned response to the food crisis, either internationally or through the actions of individual countries. There’s lots of talk about co-ordinated action, but India’s sudden change of tack shows how hard it is to make plans stick.
A consortium of Chinese state banks has lent $2.3bn to Pakistan to help the country stave off a foreign payments crisis, finance minister Miftah Ismail said on Friday.
Confirmation of the support from China, a close economic and military ally of Pakistan, came on the same day Islamabad announced a one-off 10 per cent ‘super tax’ on important industries that is intended to lead to a stalled $6bn IMF loan package being resumed.
“I am pleased to announce that Chinese consortium loan of Rmb15bn ($2.3bn) has been credited in to SBP [State Bank of Pakistan, Pakistan’s central bank] account today, increasing our foreign exchange reserves,” Ismail said in a tweet on Friday evening.
A senior government official said the arrival of the loan was “one of the signals that we’re about to return to the IMF programme”.
China had quietly urged Islamabad to repair ties with the IMF “as an essential step to improve Pakistan’s economic health and avoid a default”, the official said.
The Chinese loan will raise Pakistan’s liquid foreign reserves of $8.2bn to $10.5bn and could help shore up the rupee, which has slumped against western currencies.
Pakistan began to receive IMF payments in 2019 under a 39-month loan programme, but the fund has so far given only about half of the $6bn agreed.
In recent months, sliding confidence in Pakistan’s economy has prompted concerns it could follow Sri Lanka in defaulting on international debt.
Prime minister Shehbaz Sharif, who was elected by parliament in April following the ousting of rival Imran Khan, unveiled on Friday the new super tax to be levied on manufacturers of cement, beverages, steel, tobacco and chemicals.
“The government has decided to impose a 10 per cent ‘poverty alleviation tax’ on large-scale industries of the country,” Sharif tweeted.
Business leaders widely criticised the move and share prices on the Karachi Stock Exchange fell nearly 5 per cent after news of the tax emerged. Analysts said the decision would further fuel inflation, a central concern for households across Pakistan.
Zaffar Moti, a former KSE director, said: “This is a major setback for the economy. The government has decided to further tax those who are already paying their taxes.”
The “worrying” disparity in clean energy investments between the advanced economies and the developing nations was put into the spotlight this week, ahead of the G7 leaders meeting.
G7 economies account for about a quarter of the global energy-related carbon emissions that are behind global warming. The leaders’ meeting comes as all economies grapple to end their reliance on Russia for fossil fuel supplies as prices spike in the wake of the invasion of Ukraine.
The latest International Energy Agency world energy outlook report released last week said that while global clean energy investment had increased since the Paris climate accord was adopted in 2015, the “weakness” of clean energy investments across the developing world was “one of the most worrying trends”.
“Much more needs to be done to bridge the gap between emerging and developing economies’ one-fifth share of global clean energy investment, and their two-thirds share of the global population,” the IEA said.
The IEA cited scarce public funds, highly indebted state-owned utilities and a worsening global economic outlook as factors that made it more difficult for developing economies to invest in clean energy projects.
The agency advocated for financial and technical support, including concessional capital, private sector capital, and inflows from international carbon markets, as “crucial” for closing the gap.
The IEA also warned global investment levels in the power sector over the past three years had fallen short of the level needed to meet countries’ climate pledges, and would lead to a failure to meet the net zero global emissions target by 2050 that is required to curb climate change.
The IEA estimated global investment into power in 2022 totalled about $975bn, versus an annual requirement of $1.2tn to achieve countries’ stated policies, and $2tn to reach net zero.
It said a rapid acceleration of investment was needed in renewable technologies, alongside reduced dependency on fossil fuels, for the world to reach a 1.5C stabilisation of the rise in average global temperatures. Temperatures have already risen about 1.1C since pre-industrial times.
Power investments in emerging market economies needed to grow at a compound annual growth rate of 25 per cent to reach net zero levels, the IEA said — or twice the pace of advanced economies.
Leaders of G7 countries are expected to discuss global energy demands when they meet in Germany on Sunday. Germany’s chancellor Olaf Scholz gave assurances that climate change remained on the agenda, but the war in Ukraine has raised fears that Europe may backslide on commitments to end fossil fuel funding as coal plants and gas plants are brought into commission to compensate for the Russian supplies.
G7 countries must generate 42 per cent of their electricity by wind and solar by 2030 to keep global warming to 1.5C by 2050, the IEA has calculated.
Pressure is building on Japan, which will assume the G7 presidency next, to take a lead role in commitments to cut coal use. Tokyo agreed at the recent G7’s energy and environment ministers meeting to stop financing fossil fuel projects internationally by the end of 2022 and promised to clean up its power system by 2035. This included supporting “an accelerated global unabated coal phaseout”.
It is the only G7 country to have set a target falling short of the IEA’s recommendation of 42 per cent of energy from renewables, however, by setting itself a goal of 38 per cent.
“In the lead-up to the G7, many will ask if it is possible for Japan to achieve a 100 per cent clean energy system by 2035,” Ember said in a report last week. “While this target will be a challenge, it is achievable. The obvious place to start is scaling up rooftop solar and wind energy, which could help Japan create a far more secure and sustainable energy system by 2035.”
The EU has set an average target of 63 per cent by 2030 for the generation of electricity from renewable sources.
Among the leading bloc countries, Germany is aiming for 80 per cent by 2030, while Italy has a 70 per cent goal, and France just 38 per cent, because of its ample nuclear energy supplies that are regarded as “clean”.
The UK has said it will generate 95 per cent of its electricity from low carbon sources by 2030, and the US has committed to 100 per cent clean power by 2035 but is lagging behind the G7 in current renewable generation.
A US official told reporters in Washington this week that the subject of energy security would be “very much at the heart of discussions” at the G7 gathering.
Where climate change meets business, markets and politics. Explore the FT’s coverage here.
Are you curious about the FT’s environmental sustainability commitments? Find out more about our science-based targets here
The writer is editor-in-chief of Money Week
Are we nearly there yet? Global markets are over 20 per cent off their highs. And the past month has been particularly horrible.
Even the longstanding defensive (and supposedly diverse) strategy of having 60 per cent of your assets in equities and 40 per cent in bonds has been something of a disaster — 60/40 is heading for the worst year since 2008 (when a standard 60/40 portfolio fell 20 per cent). The only hiding place has been China.
Sadly, this level of misery does not mean there is not more misery to come. There may be a recession ahead.
Bear markets don’t necessarily cause or come with recessions. The short, but nasty, bear markets of 1962, 1966, 1987 and 2018 did not, for example. However, a recession can make a bear market very significantly worse — or, at the very least, longer.
Look at all the bears since 1902 in the US and you will see that those without a recession have lasted on average a mere 7.6 months. Those with a recession have lasted an average of 23.8 months — and that is with the generous inclusion of the super-short (one-month) bear market and state-enforced recession of 2020.
This makes sense, of course. Bear markets are, in the main, reactions to overvaluation — a reversion to some kind of mean. If there is no recession — and hence no real change to the earnings part of the equation — a fall in prices back to a level at which price/earnings ratios look OK can be quick and simple.
But add in a recession and all simplicity collapses. We can set prices when we have one moving part, but not when we have two. If you have been wondering why all market analysts are now obsessed with the possibility of a recession and how long it might last, this is why.
Figuring out the answer is a matter of establishing first where inflation will go, and second how central bankers will react to where inflation has gone. Most analysts are looking to commodity prices — the supply crunch that has driven this year’s horrible consumer price index numbers — for the answers.
Here there might be glimmers of good news. The oil price has turned down slightly and the copper price (one of the most watched numbers in the market) has just hit a 16-month low (it is down 14 per cent this year so far). Mining stocks are falling too.
This suggests the tantalising possibility that we may be near peak inflation. If that is so, then it might not be that long until central banks can pull back from raising interest rates, today’s scary anti-Goldilocks environment (everything is either too hot or too cold) will evaporate and all will be well again.
If central banks get the balance right — unlikely, I admit — we could end up seeing exactly what everyone wants: a soft landing that comes with either no growth for a few quarters or a very mild recession. Job done.
There is, however, an inflationary wild card here: wages. Listen to the news occasionally and you might conclude that real wages everywhere have been collapsing. But that is not quite right.
As market historian Russell Napier points out, by the end of April 2022, UK wages were 13.9 per cent above their pre-Covid level. Consumer price inflation had risen only 9.2 per cent.
In the past few months, inflation has hit new and nasty highs. But there is good reason to think that wages will catch up soon. The labour market in the UK remains very tight (as is the case in the US, where real wages are also up since the beginning of the pandemic). And while union membership in the UK has halved from its peak in 1979, it is rising again.
A summer of industrial action is already under way in the UK, as anyone hoping for an easy train ride to the first Glastonbury music festival in three years will know. And anyone planning to go on holiday over the summer will be increasingly worried, given that British Airways employees have just voted to strike.
There is, says Napier, “a bull market in the price of labour”. That is not necessarily bad news at all. In fact, you could see it as a welcome development. It makes a long, deep recession less likely.
Note that even in the grim consumer confidence numbers released in the UK this week, purchasing intentions remained unchanged. And, given that central banks, the US Federal Reserve in particular, appear to be more focused on the wellbeing of Main Street than that of Wall Street at the moment, pay may be an inflation driver that worries them less than others.
Where wage growth might hurt, however, is in profit margins. Look at company earnings forecasts and you will see that not much misery has been priced in.
Current estimates suggest that UK companies will report earnings per share 4 per cent above 2019 levels this year and that US and European companies will see EPS up 38 per cent and 24 per cent respectively, notes Simon French of Panmure Gordon.
A summer of strikes and real wage rises could turn that around pretty quickly, recession or no recession. We might be nearly there. It is just that our destination may not be the one we were expecting.
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