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IMF joins debate on rising energy costs

Good evening,

An IMF intervention today has sparked debate over how European governments should tackle rising energy prices, following announcements of rising profits by oil and gas companies.

The IMF said rising costs – up 40 percent in the eurozone and 57 percent in the UK – should be passed on to consumers to encourage energy conservation and a shift to greener energy, but with targeted aid for poorer households disproportionately affected by the increases.

Existing measures include price caps in France, Spain and Portugal, electricity tax reductions in Germany and the Netherlands, energy subsidies in Italy and Greece, energy surcharges in Germany and a windfall tax on North Sea companies in the UK. But as fossil fuels are likely to remain expensive for a while, the IMF said: governments “should increase retail prices to promote energy conservation while protecting poorer households”.

In many countries, the cost of moderating price increases will exceed 1.5 percent of economic output this year, which is more expensive than offsetting the increases for the bottom 20 to 40 percent of households, the IMF said.

The fund selected the UK, along with Estonia, where the cost of living for the poorest fifth of households is expected to rise by about twice as much as the cost of the richest.

Analysts yesterday predicted that energy bills in the UK would remain at “devastating” levels until at least 2024. The government’s price cap on 23 million household bills could reach £3,360 a year when the regulator Ofgem next updates it in October.

In the meantime, a new report from the think tank of the National Institute of Economic and Social Research urged the government to increase energy subsidies and benefits for at least six months when the new Ofgem ceiling comes into effect. NIESR said the recession in the UK would see more than 5 million households use up all of their savings by 2024.

Across the Channel, a 40 percent rise in energy prices helped eurozone inflation reach 8.9 percent in July.

Business warnings also come thick and fast. New data yesterday showed how rising energy and fuel costs exacerbated cash flow pressures that have caused a major jump in business insolvencies in England and Wales. Retailers in France are already adapting their practices to use less energy and are preparing for possible shortages.

Meanwhile, the energy companies are reaping the benefits. BP yesterday reported its highest quarterly profit in 14 years of $8.5 billion, but said it had no plans for fuel price cuts for motorists – unlike France’s TotalEnergies, which has promised some relief from September. ExxonMobil and Chevron also reported record quarterly profits, while Shell broke its earnings record for the second quarter in a row, announcing a $6 billion share buyback.

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Need to know: the economy

The visit to Taiwan by Nancy Pelosi, the Speaker of the US House of Representatives, continues to stir up a stir with China. The trip is seen as a test of China’s determination to deter foreign aid for Taipei. The first reactions from Beijing include a blockade on the import of 2,000 food products from Taiwanese producers.

Latest for UK and Europe

British services according to the S&P Global/Cips, purchasing managers index performed weakest in July since February 2021, as inflation hit demand. The PMI fell to 52.6 from 54.3 in June, where 50 marks the gap between growing and contracting activity.

German Chancellor Olaf Scholz has granted a reprieve for Germany’s last nuclear power plants and blamed Russia for a turbine problem with the Nord Stream 1 gas pipeline. Europe increased imports of Russian diesel in July, highlighting the difficulties in implementing EU plans for a ban.

A former official at the National Bank of Ukraine wrote in the Financial Times that Kiev’s allies had to increase aid to $4 to $5 billion a month to avoid economic disaster.

Ukrainian Minister of Infrastructure Oleksander Kubrakov told the FT it would take months for grain exports to reach pre-war levels and ease pressure on global food supplies. The prospect of a reopening of the Black Sea corridor, along with fears of a global recession and record harvests in Russia, have recently depressed prices for agricultural commodities such as wheat.

Line chart of CBOT wheat ($ per bushel) showing wheat prices back to pre-war levels

inflation in Turkey has reached nearly 80 percent, increasing pressure on the country’s central bank to raise interest rates, despite opposition from President Recep Tayyip Erdoğan, who rejected the traditional economic theory that raising interest rates helps curb rising prices .

Rising mortgage rates in the eurozone announce a potential slowdown in the bloc’s housing market, but UK property prices are still rising at an annual rate of 11 percent, according to new data from Nationwide.

Worldwide last

opec and its allies have agreed on a small increase in oil production to 100,000 barrels per day, or just 0.1 percent of global demand. The turnout is likely to disappoint Western capitals following overtures to the Saudis over the past week by Presidents Joe Biden and Emmanuel Macron.

Acting Governor of the State Bank of Pakistan Murtaza Syed wrote in the FT that developing countries hit by debt problems would not forget if the rich world abandoned them in a moment of crisis.

Need to know: business

BMWShares fell sharply today, despite a positive earnings statement, as it warned the sale was likely to be hit by the economic slowdown.

Ferrari followed other luxury car manufacturers in reporting bumper gains and improving annual earnings forecasts. At the other end of the spending scale, the Lex column says the “lipstick effect” — where consumers splash on a small luxury item with a fine — is helping the Swiss chocolatier Lindt.

axa became one of the first insurers to detail the effects of the war in Ukraine, with losses of €300 million from stranded planes and damaged buildings. However, it was still able to report higher-than-expected revenues and profits and announcing a €1 billion share buyback. French bank Société Générale said its exit from Russia had cost it €3.3 billion, while it slipped to a loss of €1.5 billion in the second quarter.

Germany’s Commerzbank has issued a stark warning of “a chain reaction with unforeseen consequences” for the country’s economy and chemical industry if the gas shortage deepens.

Robin Hoodthe company that promised to revolutionize securities trading is laying off nearly a quarter of its staff as the retail bubble bursts.

hedge funds are headed for one of their worst years since failing to offset the sharp declines in stock and bond markets, especially those that had been betting on the high-growth companies that did well during the pandemic. Group of menone of the largest, reported weaker-than-expected inflows and said customers were demanding more of their cash back as the prospect of more market turbulence mounts.

Column chart of annual change in HFRI fund-weighted composition (%) leaving hedge funds on track for steep decline in 2022

Supply chain disruption is still good news for shippers. Maersk raised its earnings forecast for the third time this year, saying a “gradual normalization” in freight rates is unlikely to happen before the fourth quarter. However, setting up supply chains to favor political allies is not the best way to solve current problems, Alan Beattie said in the Trade Secrets newsletter.

High booking prices boosted turnover in the second quarter Airbnb as the company took advantage of the pent-up demand for travel. The average price per night on the platform was $163.74, lower than the previous quarter but still 40 percent above pre-pandemic levels. The Lex column says investors should not underestimate people’s desire to travel after more than two years of Covid restrictions.

Getting to that holiday spot, at least for those flying from the UK, can be a bit trickier now. BA has extended the suspension of the sale of short-haul tickets at Heathrow, affecting the airline’s domestic and European routes, as well as flights via Morocco and Cairo. Delphine Strauss looks at broader labor relations at Heathrow.

There was better news on the other side of the Atlantic, where… United Airlines, the second-largest airline in the US, reported record quarterly sales and its first profit since the start of the pandemic, despite a large number of cancellations in May and June. Chief executive Scott Kirby warned that record fuel prices and the increasing possibility of a global recession still pose serious risks.

The world of work

The FTs The work podcast discusses what companies can do to help their workforce deal with the cost of living crisis, instead of giving them double-digit wage agreements to match inflation. The return to the office is also threatened by the rising cost of commuting.

“It’s often said that the pandemic split the world of work into those who could work from home and those who couldn’t, but in reality, the virus mostly exposed cracks of inequality that were already there. The warming planet will likely do the same,” says columnist Sarah O’Connor, arguing that employers need to do more to address health, safety and productivity risks as global temperatures rise.

Covid cases and vaccinations

Total number of worldwide cases: 573,3mn

Total Doses Administered: 12.4 billion euros

Get the latest global photo with our vaccine tracker

What good news

If the threat of a insect apocalypse looms, a new wave of apps and AI-driven advancements are helping gardeners encourage bees and butterflies back to their gardens. One online tool even offers the option of “pollinator view” so you can see your garden through the eyes of an insect.

Illustration of flowers, bees, butterflies and other insects and four people.
Innovating to pollinate: high-tech ways to welcome insects into your garden © Harriet Russell

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