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Global business faces perfect storm

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Good evening,

Another week, another round of reminders of the headwinds facing global business as it battles against surging inflation, rising interest rates, the energy crisis and another message from China that coronavirus is not yet done.

Chinese stocks fell this morning on news of more Omicron-driven infections in several cities, fuelling fears that damaging lockdowns could return and snag global supply chains in the process.

Shanghai has discovered its first case of the BA.5 sub-variant, raising fears of further restrictions in China’s most commercially important city just weeks after a two-month shutdown had caused chaos in global markets. Eleven cities are now under full or partial lockdowns, including a week-long closure of all non-essential businesses in Macau.

Meanwhile, Omicron is also driving up hospitalisations in Europe and the US. 

Investors are also expecting a more aggressive tightening of monetary policy in the US after Friday’s unexpectedly strong jobs data. But they are also concerned about the flow of gas to Europe after Russia shut its Nordstream 1 pipeline for 10 days of maintenance, adding to fears that Moscow may use the opportunity to stop or trim its exports.

In the UK, companies are starting to “war game” for a recession as consumer demand slows and costs continue to rise. One supermarket boss described September as the “come to Jesus” month — when the penny drops for households that they need to shell out on new school kit just as holiday spending ends and energy costs ratchet up.

Those businesses reliant on discretionary spending, such as travel and leisure groups, are likely to be hit especially hard as the post-pandemic spending splurge dries up.

The effect of higher interest rates, lower savings and higher energy costs on company finances is likely to become much clearer around Christmas. “The first-quarter results season was good. The second quarter will probably be fine too. The real hit will be more likely in the third quarter or fourth quarter this year,” said one analyst. New UK retail data for June tomorrow will also be closely watched after falls in sales volumes in April and May.

One of the few bright spots is pet care. “Most consumers prioritise their pets over spending on themselves,” said investment bank Peel Hunt. “We have always thought that the last three things to ‘go’ in a recession are the Sky Sports subscription, the monthly new pair of trainers and the dog.”

Even those companies that are meant to flourish during tough times are coming unstuck. Sweden’s Klarna, the buy now, pay later company that was once Europe’s most valuable private fintech, had its valuation slashed today in the clearest sign of the struggles facing the sector as inflation surges and consumers retrench.

Cutbacks in discretionary spending are also likely to damage big US retailers. Amazon is hoping its Prime Day promotional jamboree tomorrow can rejuvenate slowing sales growth, while bricks-and-mortar stores such as Target and Walmart have already issued profit warnings.

Latest news

For up-to-the-minute news updates, visit our live blog

Need to know: the economy

Chief economics commentator Martin Wolf does a deep dive into the faltering UK economy. What is most important is simple to describe and hard to solve: the long-term stagnation in productivity and real incomes. The breakdown in relations with the EU meanwhile was highlighted by Financial Times revelations that the ministerial body that governs Britain’s trade deal with Brussels has not met for over 13 months.

Line chart of growth rates over 15-year periods (%) showing the years before the pandemic saw very low growth in output per head and household incomes

Latest for the UK and Europe

Cuts of 30 per cent in funds for England’s bus network as pandemic subsidies end could mean unprofitable routes being slashed and communities isolated.

Eurozone finance ministers meeting in Brussels today have the task of mitigating households’ pain from soaring energy prices while not adding to upward pressures on inflation, reports our Europe Express newsletter. Hungary made concessions to Brussels in the stand-off over the rule of law and transparency as it tried to unlock €15bn in pandemic recovery funds.

If history is any guide, the $750bn price tag for rebuilding Ukraine’s economy is likely to be wide of the mark, says the Lex column. America set the tone with its Marshall Plan for Europe after the second world war came in at an inflation-adjusted $156bn, but modern wars are far more costlier, it notes.

A treemap chart showing the cost of rebuilding Ukraine compared with other major conflicts

Global latest

US president Joe Biden heads to the Middle East hoping to reset strained relations with Saudi Arabia and make some headway in tackling soaring oil prices. Rising petrol costs have led to a record fall in Americans visiting national parks.

Abortion bans across the US will hit the most economically vulnerable women who are already under pressure from the rising cost of living. “People with resources can travel . . . [and] will figure out how to order pills online . . . It’s very likely that wealthier people will be able to circumvent their state laws and poor people will not,” says one expert.

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More than 1bn Covid-19 vaccines — more than 10 per cent of all shots produced — have been wasted because of lopsided distribution, vaccine hesitancy and storage problems, according to a new analysis. European health agencies have backed a second Covid booster for the over-60s.

Sri Lanka’s president Gotabaya Rajapaksa is to step down after mass protests at the weekend over rising prices and shortages that sent him into hiding. The crisis is one of the most acute among emerging market economies struggling to service debt as food and commodity prices soar while interest rates ratchet upwards.

Quantitative easing is being replaced by quantitative tightening as central banks start to shrink their balance sheets. Fund managers however say they have no idea how it will play out.

Column chart of assets ($tn) showing the balance sheets of central banks are set to shrink

The “perfect storm” of soaring inflation, tightening monetary policy and the war in Ukraine has led to investors pulling $50bn from emerging market bond funds this year, the most severe outflow in at least 17 years. Existing emerging markets could soon be joined by the US, argues columnist Rana Foroohar, as political risk and volatility rises and the country declares war on itself.

Column chart of annual net fund flows ($bn) showing investors ditch emerging market bonds

Need to know: business

Second-quarter reporting season for the big US banks begins this week, with analysts expecting earnings boosts for JPMorgan Chase, Bank of America and Citigroup. “Main Street banking has been incredibly pressured for the past decade, due to zero interest rates during most of that time. So now it’s finally going back directionally to a more normal interest rate environment,” said one analyst.

Wizz Air is the latest airline to cut flights as disruption continues at London Heathrow airport. The Hungary-based carrier reported an operating loss of €285mn in the latest quarter and became one of the first airlines in Europe to quantify the financial impact of this summer’s disruption, which it said had cost €50mn.

In better news for the aviation sector, Airbus revised up its estimate for global jet demand over the next 20 years, although it said passenger numbers would not grow as fast as previously thought.

STMicroelectronics and GlobalFoundries are building a semiconductor manufacturing factory in France, a project that will receive significant government support as part of EU efforts to secure supplies and overcome reliance on Asian supplies. “This is the biggest industrial investment in recent decades outside of the nuclear sector and a big step for our industrial sovereignty,” said French finance minister Bruno Le Maire.

Many of the financial innovations of the past decade — with names such as back-leverage, NAV financing and subscription financing — are about to be tested for the first time in a “down market” as lawyers gear up for a series of bankruptcy cases. The most novel resolutions will almost certainly be in the crypto world, writes US Lex editor Sujeet Indap.

Cut through the crypto jargon and get the latest news and analysis with our new weekly Cryptofinance newsletter, which launches on Friday.

Oil companies are ramping up spending on social media to burnish their image during the energy crisis and push for expansion of domestic capacity.

A BP sponsored social media post

The World of Work

Despite a welter of laws and guidelines, the gender pay gap persists. Is it time for salaries to become more public? And how is a scheme to get more women in UK boardrooms faring 10 years on?

The Lex column looks at how low pay and inflation have fuelled the search for a second job since the pandemic began.

Despite the smooth transition to working from home by London’s insurance industry, Lloyd’s of London has decided to stay in its landmark City building, a vote of confidence in centuries-old face to face trading.

Covid cases and vaccinations

Total global cases: 549.9mn

Total doses given: 12.1bn

Get the latest worldwide picture with our vaccine tracker

And finally . . . 

Whether you work in London or are lucky enough to snag the occasional business trip, don’t miss the opportunity to sip a pint in one of the City’s historic boozers. Here’s FT Globetrotter’s top 10.

A pub sign,  glass of beer and barrels in a London pub
© © Marco Kessele

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