IMF joins debate on rising energy costs

Good evening,

An intervention from the IMF today has added fuel to the debate about how European governments should tackle the surge in energy prices and comes hot on the heels of announcements of soaring profits by oil and gas companies.

The IMF said rising costs — up by 40 per cent in the eurozone and 57 per cent in the UK — should be passed on to consumers to encourage energy saving and a shift to greener power, but with targeted help for poorer households that are disproportionately affected by the increases.

Existing measures include price caps in France, Spain and Portugal, electricity tax cuts in Germany and the Netherlands, energy subsidies in Italy and Greece, energy allowances in Germany and a windfall tax on North Sea companies in the UK. But with fossil fuels likely to remain expensive for some time, the IMF said governments “should let retail prices rise to promote energy conservation while protecting poorer households”.

In many countries, the cost of mitigating price rises will pass 1.5 per cent of economic output this year, which is more expensive than offsetting increases for the bottom 20 to 40 per cent of households, the IMF said.

The fund singled out the UK, along with Estonia, where living costs for the poorest fifth of households are expected to rise by about twice as much as costs for the wealthiest.

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

In the meantime, a new report by the National Institute of Economic and Social Research think-tank urged the government to boost energy grants and benefits payments for at least six months when the new Ofgem ceiling takes effect. NIESR said the UK downturn would lead to more than 5mn households using up all their savings by 2024.

Across the Channel, a 40 per cent jump in energy prices contributed to eurozone inflation hitting 8.9 per cent in July.

Warnings from the business world are also coming thick and fast. New data yesterday highlighted how soaring energy and fuel costs were exacerbating cash flow pressures that have driven a large jump in corporate insolvencies in England and Wales. Retailers in France are already adapting practices to use less energy as well as preparing for potential shortages.

Meanwhile, energy companies are reaping the benefit. BP reported its highest quarterly profit in 14 years of $8.5bn yesterday, 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 profit record for the second quarter in a row and announced a $6bn share buyback.

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Need to know: the economy

The visit to Taiwan by Nancy Pelosi, the US House of Representatives Speaker, continues to cause ructions with China. The trip is seen as a test of China’s resolve in deterring foreign support for Taipei. Initial reactions from Beijing include a block on the import of 2,000 food products from Taiwanese producers.

Latest for the UK and Europe

UK services in July had their weakest performance since February 2021 as inflation hit demand, according to the S&P Global/Cips purchasing managers’ index. The PMI reading fell to 52.6 from 54.3 in June, where 50 marks the divide between activity expanding and contracting.

German chancellor Olaf Scholz has backed a reprieve for Germany’s last nuclear power plants and blamed Russia for a turbine problem with the Nord Stream 1 gas pipeline. Europe stepped up 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 Kyiv’s allies needed to increase their aid to $4bn-$5bn a month to help ward off economic calamity.

Ukraine’s infrastructure minister Oleksander Kubrakov told the FT it would take months before grain exports would reach prewar levels and ease the pressure on global food supplies. The prospect of a reopening of the Black Sea corridor, along with global recession fears and record crops in Russia, have recently pushed down prices for agricultural commodities such as wheat.

Inflation in Turkey has hit nearly 80 per cent, increasing pressure on the country’s central bank to raise interest rates despite resistance from president Recep Tayyip Erdoğan, who has rejected traditional economic theory that raising rates helps curb rising prices.

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

Global latest

Opec and its allies have agreed a small increase in oil production of 100,000 barrels a day, or just 0.1 per cent of global demand. The rise is likely to disappoint western capitals after overtures to the Saudis in recent week from 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 let them down in a moment of crisis.

Need to know: business

BMW’s shares fell sharply today despite a positive earnings statement as it warned that sales would likely take a hit from the economic slowdown.

Ferrari followed other luxury carmakers in reporting bumper profits and upgrading its annual earnings forecast. At the other end of the spending scale, the Lex column says the “lipstick effect” — where cash-strapped consumers splash out on a small luxury item — is helping Swiss chocolatier Lindt.

Axa became one of the first insurers to detail the fallout from the Ukraine war, revealing losses of €300mn from stranded planes and damaged buildings. It was however still able to record higher than expected revenues and profits and announce a €1bn share buyback. French bank Société Générale said its exit from Russia had cost it €3.3bn as it swung to a €1.5bn loss in the second quarter.

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

Robinhood, the company that promised to revolutionise stockbroking, is laying off almost a quarter of its staff as the retail trading bubble bursts.

Hedge funds are set for one of their worst years on record after failing to offset sharp falls in equity and bond markets, especially those that had bet on the fast-growing companies that did well during the pandemic. Man Group, one of the largest, reported weaker than expected inflows and said clients were asking for more of their money back as the prospect of more market turbulence increases.

Column chart of annual change in HFRI fund weighted composite (%) showing hedge funds on track for steep on 2022 fall

Supply chain disruption is still good news for shippers. Maersk raised its profit forecast for the third time this year and said a “gradual normalisation” in freight rates was unlikely to happen before the fourth quarter. Constructing supply chains to favour political allies however is not the best way to solve current problems, argues Alan Beattie in the Trade Secrets newsletter.

High booking prices boosted second-quarter revenues at Airbnb as the company capitalised on pent-up demand for travel. The average price per night on the platform was $163.74, lower than the previous quarter but still 40 per cent 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, could now be a bit trickier. BA has extended its suspension of Heathrow short-haul ticket sales, affecting the airline’s domestic and European routes as well as flights via Morocco and Cairo. Delphine Strauss looks at wider labour relations at Heathrow.

There was better news across the Atlantic, where United Airlines, the US’s second-largest carrier, reported record quarterly revenues and its first profit since the pandemic began, despite a host of cancellations in May and June. Chief executive Scott Kirby warned that record fuel prices and the increasing possibility of a global recession still posed severe risks.

The World of Work

The FT’s Working It podcast discusses what companies can do to help their staff cope with the cost of living crisis, short of giving them double-digit pay deals to match inflation. The return to the office is also under threat from the rising cost of commuting.

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

Covid cases and vaccinations

Total global cases: 573.3mn

Total doses given: 12.4bn

Get the latest worldwide picture with our vaccine tracker

Some good news

As the threat of an insect apocalypse looms, a new wave of apps and AI-driven advances are helping gardeners encourages bees and butterflies back to their gardens. One online tool even allows the option of “pollinator vision”, letting you see your garden through the eyes of an insect.

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

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