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Item A on next British PM’s agenda: inflation crisis

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Boris Johnson says his caretaker government will freeze tax policy, leaving any changes to his successor
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Prime Minister Boris Johnson’s government is in suspended animation, including on economic policy, just as a cost-of-living crisis worsens for millions of Britons. 

But tax cuts are inevitable under a new leader, to confront the financial pain that is rapidly spreading in the world’s fifth-largest economy, analysts say.

Low taxes are an article of faith for the Conservative rank and file who will elect Johnson’s successor in the coming months, after he announced his resignation as party leader on Thursday.

“The cost-of-living crisis is forefront of voters’ minds,” Hargreaves Lansdown economist Sarah Coles told AFP.

“A new leader will have to provide effective support for those who are facing the toughest challenges, or they risk being punished at the ballot box,” she said.

Johnson was expressing defiance as late as Wednesday night, when aides said that he was planning a tax-cutting statement next week with his new finance minister, Nadhim Zahawi. 

The resignation statement put paid to that plan. 

Johnson’s new-look cabinet appointed Thursday agreed that “major fiscal decisions should be left for the next prime minister”, Downing Street said.

Zahawi’s predecessor Rishi Sunak quit on Tuesday along with Johnson’s health minister, sparking an exodus of other ministers fed up with his premiership’s many scandals.

Sunak had sought to prioritise balancing the books after spending billions on Britain’s costly Covid support measures.

He had ramped up taxation on corporate profits, and on paid employment, in order to help pay the pandemic bill and fund elderly social care.

But Britons, like others in many countries, are also grappling with soaring consumer prices fuelled partly by fallout from Russia’s war on Ukraine, which has destabilised energy markets. 

UK inflation sits at a 40-year peak, driven also by elevated food prices, and is tipped to hit double figures soon with the average domestic energy bill set to top £3,000 ($3,600) a year.

– Heat or eat –

Many Britons say that this winter, they will have to choose between heating or eating.

The nation also faces nationwide strikes — particularly in the transport sector — as the purchasing power of wages is rapidly eroded.

The next Conservative premier will therefore face a challenge to survive beyond the next general election, when this parliament’s term ends in late 2024. 

But first they must win over the Tory grassroots.

“Johnson’s replacement will probably have to show some intention of cutting taxes in order to be voted in by Conservative party members,” agreed Capital Economics analyst Kieran Tompkins.

Added to the gloom, the Bank of England warns that the economic outlook at home and abroad has deteriorated due to the high inflation.

The BoE has ramped up interest rates five times since December to tackle inflation — but this also lifts loan repayments such as mortgages, and has further stretched household budgets.

Some economists warn that tax cuts, while stimulating consumer demand and economic growth, could fuel the inflationary price pressures.

“Tax cuts are a staple Conservative policy and can be a vote-winner, although on this occasion care may be needed,” cautioned AJ Bell investment director Russ Mould.

UK businesses also face fallout from Britain’s departure from the European Union, as well as a global supply-chain crunch and staff shortages as demand picks up after the pandemic.

“Tax cuts won’t help those and could make them worse, fuelling inflation and forcing the Bank of England to increase interest rates faster and further,” said Mould.

The government’s fiscal spending watchdog, the Office for Budget Responsibility, this week added to doubts about the wisdom of any sharp reduction in taxes.

The OBR warned that Britain’s public finances were “on an unsustainable path in the long term”.

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US regulators clear Boeing to resume 787 deliveries

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The FAA has approved changes Boeing made to production of its 787 Dreamliner which will allow deliveries to resume
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After more than a year, aviation giant Boeing will be allowed to resume deliveries of its 787 Dreamliner aircraft “in the coming days,” after the company made changes to its manufacturing process, US air safety regulators announced Monday.

Deliveries of the top-selling widebody plane have been halted since spring 2021, so the news will be welcomed by US airlines and travelers who have suffered from massive delays and canceled flights in recent weeks, partly due to the shortage of aircraft.

“Boeing has made the necessary changes to ensure that the 787 Dreamliner meets all certification standards,” the Federal Aviation Administration said in a statement.

The plane’s travails date to late summer 2020, when the company uncovered manufacturing flaws with some jets. Boeing subsequently identified additional issues, including with the horizontal stabilizer.

The difficulties curtailed deliveries between November 2020 and March 2021. Boeing suspended deliveries later in spring 2021 after more problems surfaced.

Acting FAA Administrator Billy Nolen met with safety inspectors in South Carolina last week to confirm they were satisfied with the company’s improvements, which were made to ensure they comply with standards and to identify potential risks after defects were uncovered on the plane.

“The FAA will inspect each aircraft before an airworthiness certificate is issued and cleared for delivery,” the statement said. “We expect deliveries to resume in the coming days.”

– Cleared for takeoff –

A company spokesman told AFP that Boeing will “continue to work transparently with the FAA and our customers toward resuming 787 deliveries,” but did not confirm the firm had received final FAA approval.

During a July 27 earnings conference call, Chief Executive Dave Calhoun described the company was “on the verge” of garnering approval, though he declined to give a precise target date.

At the end of June, Boeing had 120 Dreamliner planes in inventory and was producing the jet “at very low rates,” the company said in a filing.

The company’s stock price gained ground on the news, closing 0.5 percent higher.

Inability to deliver the Dreamliner has dragged down Boeing’s profits, which plunged 67 percent in the second quarter. And the manufacturing changes have led to billions in additional costs for the company.

The firm has delivered just over 1,000 of the planes since it was first introduced in 2004.

The enhanced regulatory scrutiny of the 787 and other Boeing planes comes on the heels of a pair of crashes in 2018 and 2019 on the 737 MAX, which led to aircraft being banned from the skies globally for more than a year.

But the MAX has since returned to service, enabling Boeing to ramp up production of the planes, collect meaningful revenues and announce significant new orders at the Farnborough Airshow earlier this month.

Even so, Boeing’s backlog of orders in the pipeline lags behind that of archrival Airbus.

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No recession in Switzerland this year: chief economist

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The Swiss economy is 'doing well' despite the impact of the war in Ukraine on energy prices, the country's chief economist said
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Switzerland does not expect to dip into recession this year despite the threat of an energy supply squeeze, the government’s chief economist said Sunday.

The Swiss economy is “doing well” despite the impact of the war in Ukraine on energy prices, Eric Scheidegger told the SonntagsZeitung newspaper.

He said it was down to companies to steel themselves for the possibility of power shortages in the winter months.

“We may have to revise our economic forecast downwards for next year. The revised forecast will be published on September 20. However, we do not expect a recession for this year,” Scheidegger said.

“We run the risk of an energy supply bottleneck in winter. If there are persistent production interruptions in the EU and we ourselves have a gas shortage, it becomes problematic.

“In our negative scenario, we expect zero growth for 2023 instead of growth of almost two percent.”

Despite the threat of power shortages and the effects of the war in Ukraine, Scheidegger does not see a serious economic crisis heading towards Switzerland.

“At present, the economy is still doing well. Current indicators show that the economy in this country also developed well in the second quarter — after the outbreak of the war in Ukraine,” he said.

“Economic support measures such as general perks or tax relief are currently therefore neither necessary nor helpful,” he added.

– ‘Foreseeable events’ –

Scheidegger said the Swiss economy was less susceptible to high energy prices than other European countries as gas accounted for only five percent of its total energy consumption.

He said the government would discuss possible measures to curb high energy prices in the coming weeks, which could involve reducing health insurance premiums for low-income households.

The State Secretariat for Economic Affairs official said the help for businesses during the Covid-19 pandemic could not become the norm during economic downturns.

“It’s been known since spring that there can be a power shortage in winter. Companies have time to prepare for this,” he said.

“Companies can, and must, take this operational risk into account… it is up to companies to prepare for foreseeable events.”

As for inflation, he said Switzerland was “an island of bliss” compared to the United States, and inflation was likely to fall before the end of the year.

“At 3.4 percent, inflation is much lower here than in other countries.  Core inflation — inflation excluding fresh food, energy and fuel — is at two percent,” he said.

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Markets struggle as strong US jobs boost Fed rate hike bets

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Attention turns to US inflation data this week after a forecast-beating jobs report put fresh pressure on the Federal Reserve to continue with its aggressive pace of interest rate hikes
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Asian markets struggled Monday and the dollar held big gains as a blockbuster US jobs report ramped up bets that the Federal Reserve will announce more sharp interest rate hikes as it tries to tame runaway inflation.

While the employment reading — which was more than twice as high as expected — indicated the world’s top economy remained resilient despite rising prices and borrowing costs, it will complicate the bank’s plans to tighten monetary policy.

Traders have hoped that with several indicators pointing to a slowdown, including GDP figures showing a technical recession, policymakers could begin to ease back on their pace of rate hikes.

Now, speculation is growing that the Fed will have to announce a third successive 75 basis-point increase next month, particularly as officials have said their decisions will be data-dependent.

“Friday’s payroll report indicates an overheated labour market that continues to tighten further,” said SPI Asset Management’s Stephen Innes.

“Hence at minimum, the markets expect another 100 basis points of Fed funds rate increases over the next three meetings… with risks skewed towards significant increases.”

All eyes are now on the release this week of US July inflation data, which is expected to show a slight slowdown from June but still at four-decade highs.

The “report seems very unlikely to offer ‘compelling evidence’ of a slowdown needed for the Fed to pull away from its aggressive inflation-fighting mode.” Innes added.

The jobs figures left Wall Street’s main indexes mixed Friday, and Asia followed suit with markets fluctuating in early trade.

However, there was some relief that tensions had calmed since Nancy Pelosi’s visit to Taiwan last week sparked a furious reaction from China that saw it conduct days of live-fire military drills around the island.

Hong Kong dipped along with Sydney, Seoul, Singapore, Taipei, Manila, Jakarta and Wellington.

Tokyo edged up and Shanghai was flat, with better-than-expected Chinese trade data offset by fresh worries about Covid lockdowns in the country that threaten the economic recovery.

The prospect of higher interest rates sent the dollar surging, and it held on to those gains in Asia.

Bets on a recession across leading economies continued to weigh on oil prices as investors worry about the impact on demand — figures last week indicated Americans were driving less now than in summer 2020 at the height of the pandemic.

A rise in US stockpiles was partly responsible for a 10 percent drop in the commodity last week, pushing WTI below $90 for the first time since February.

Both main contracts have lost all the gains seen in the wake of Vladimir Putin’s invasion of Ukraine, which led the United States and Europe to ban imports of Russian crude, hammering already thin supplies.

– Key figures at around 0230 GMT –

Tokyo – Nikkei 225: UP 0.2 percent at 28,241.09 (break)

Hong Kong – Hang Seng Index: DOWN 0.6 percent at 20,072.68

Shanghai – Composite: FLAT at 3,227.00

Euro/dollar: DOWN at $1.0181 from $1.0184 Friday

Pound/dollar: DOWN at $1.2071 from $1.2075

Euro/pound: UP at 84.35 pence from 84.32 pence

Dollar/yen: UP at 135.32 yen from 135.00 yen

West Texas Intermediate: DOWN 0.2 percent at $88.87 per barrel

Brent North Sea crude: DOWN 0.3 percent at $94.68 per barrel

New York – Dow: UP 0.2 percent at 32,803.47 (close)

London – FTSE 100: DOWN 0.1 percent at 7,439.74 (close)

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