‘Brace’ for surge in eurozone energy prices, economists warn

Higher bills will hurt consumers and threaten the region’s post-pandemic economic recovery

Valentina Romei in London 

There are many reasons behind the price surge, from low European energy stocks and US storms that curbed Texas gas exports, to rebounding demand as economies reopen © FT montage; Dreamstime

Soaring energy prices will push up broader inflation across Europe this year, hurting consumers and threatening the region’s post-pandemic economic recovery, economists are warning.

Benchmark European gas prices have already tripled this year, even before peak winter demand kicks in. 

Norway’s Equinor, one of Europe’s biggest gas suppliers, said last week that high energy prices could last well into 2022 and warned of possible price spikes.

“Brace for a surge in eurozone gas inflation,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics. 

Rising energy prices will drive “an acceleration in the eurozone’s headline inflation,” added Daniel Kral, economist at Oxford Economics.

There are multiple reasons behind the price surge, from low European energy stocks and US storms that curbed Texas gas exports, to rebounding demand as economies reopen. 

Climate change policies that seek to incorporate the rising price of carbon have also had an effect.

The eurozone’s consumer price index for energy has already risen to its highest level since records began in 1996. 

In August, its 15.4 annual per cent increase, the series’ biggest jump since the global financial crisis, pushed the eurozone’s headline inflation rate to a decade high of 3 per cent.

That is well above the European Central Bank’s 2 per cent inflation target.

But ECB officials and economists have said they expect the rise to be temporary, because of one-off factors such as supply chain disruptions, as the developed world emerges from the pandemic.

Even so, a prolonged rise in energy prices could derail those inflation forecasts. Higher energy bills would also hit household budgets and consumer confidence, threatening economic recovery.

It “would act as an effective tax increase on households . . . reducing their discretionary outlays and slowing Europe’s recovery, which has largely been driven by the rebound in consumer spending,” said Nick Andrews, analyst at Gavekal, an investment research group.

Energy accounts for almost 10 per cent of consumer spending in Europe, so “the double-digit yearly increase of energy prices . . . is having an important effect,” said Peter Vanden Houte, ING’s chief economist.

The impact of higher energy prices goes beyond the EU.

In August, the annual rate of energy price inflation rose by more than 60 per cent in Norway, topped 20 per cent in Canada and the US, and registered double-digit increases in South Korea, Chile and Mexico.

It has had ripple effects on other commodities, pushing up the price of oil and potentially food. 

It has also prompted governments to react.

Last week, Spain announced a €3bn raid on energy companies’ profits. 

Italy’s government has already spent about €1.2bn to subsidise consumer bills. 

Some EU lawmakers have also called for an investigation into whether Russian gas exporter Gazprom manipulated gas prices.

Alexei Miller, head of Gazprom, said on Friday that low stocks could force European gas prices to new highs through the winter, according to state-run Tass newswire.

On top of that the price of carbon permits, a central plank in EU plans to slash emissions, has almost doubled this year. 

This “suggests that energy bills will be higher in the future,” Jessica Hinds, economist at Capital Economics, said.

The immediate inflationary impact of higher energy prices is all but unarguable. 

Barclays economist Silvia Ardagna estimated it could push up headline eurozone inflation to a peak of 4.3 per cent this November.

Whether that will lead to higher core inflation — a measure which strips out volatile energy and food prices and which the ECB watches when gauging whether to change monetary policy — is another matter.

“Higher energy inflation alone won’t push the ECB,” Vistesen said.

Nor will higher energy prices necessarily lead to slower overall growth because high household savings accumulated during lockdown could leave consumer spending power largely unaffected.

The recovery in employment, as reflected in high job vacancies, could also help. 

“We are not making any change to our growth outlook at this time,” Ardagna said.

Still, high energy costs will with little doubt be a problem for many, whether those are less well-off individuals or companies for which energy is an important input.

“A cold snap at the start of winter is now a real economic threat, for low income households and some manufacturing sectors,” Vistesen said.

Additional reporting by Max Seddon in Moscow

Emerging market bonds fall victim to fickle sentiment

In the topsy-turvy world of developing world debt issuance, good times never seem to last

Chinese consumers walking past stores in a shopping mall in Beijing last year © Nicolas Asfouri/AFP via Getty Images

While some regard emerging market bonds as punchy play in the often stolid world of fixed income investing, others see the field as all too dependent on fickle sentiment.

At the turn of this year, the asset class was back in vogue just months after the nadir of the second quarter of 2020 — when outflows broke records amid the onset of the global coronavirus pandemic.

Investors returned en masse. Hopes of a rapid rollout of vaccines were rising, Joe Biden’s presidential victory was seen as positive for globalisation and cross-border trade. Meanwhile, extraordinarily loose monetary policy in the developed world meant “there was a crowding-out effect into emerging markets”, explains Jonathan Fortun, an economist at the Institute of International Finance, an industry association.

Governments of emerging markets rushed to take advantage of this sweet spot, with a wave of bond issuance eliciting still higher inflows. 

But, as so often in the topsy-turvy world of developing countries, the good times could not last.

A Londoner receiving a Covid vaccine in August © Henry Nicholls/Reuters

“It has been a much more challenging backdrop to EMs in 2021 than I think a lot of people expected,” says Paul Greer, portfolio manager, emerging market debt at Fidelity International. 

“Over the last nine months, for a variety of reasons, it has felt that the market has been chipping away at the upbeat positive note that it had at Christmas.”

So far this year, hard currency EM government bonds have eked out a total return of just 0.3 per cent. 

Worse still, investors in local currency sovereign debt have lost 4.8 per cent as their currencies weakened against the dollar, with the bright spot being the 2.2 per cent return in corporate bonds denominated in “hard currencies” such as dollars and euros.

Greer points the finger at the US Democrats’ unexpected control of both houses of Congress, opening the door to unprecedented levels of fiscal stimulus under President Biden, increased interest rates, and a strengthening dollar.

“Since the Georgia senate race [giving the Democrats control], Treasury yields have started to go up,” Greer points out. 

“Since then, we have been de-risking. We are much less optimistic on EM now.”

Georgia Democratic Senate candidates Jon Ossoff and Raphael Warnock greet each other onstage last December © Getty Images

Gregory Smith, emerging markets fund manager at M&G Investments, also notes: “We have seen a slightly more hawkish tone from the Fed as the US economy has come back; that hits EMs when the US 10-year yield rises.”

Other factors have heightened the gloom. Smith points to the Delta variant of coronavirus rendering the pandemic “more voracious” in countries such as India and Indonesia, while “those that apply a ‘zero Covid’ approach such as China have really struggled to stop the virus from spreading”.

“Growth matters,” says Fortun. 

“We are pencilling in weaker growth [in EMs] because of Delta and, also, because of the weakness in internal demand due to the lack of fiscal space [room in the government budget for spending] many countries are going to have in the future, plus the lack of vaccines”.

“EMs have higher growth than DMs [developed markets] — that’s why many people invest in the asset class,” adds Greer. 

“But it feels like we have gone through the peak of global growth now.”

Greer argues Beijing is “deprioritising growth . . . with the pendulum swinging towards managing financial conditions and fiscal prudence” as well as tackling inequality.

Greer argues that China is also an “engine of growth” for many other emerging markets via its demand for their commodities. 

Weaker growth in China may lead to weaker currencies across the developing world, he fears.

Shanghai shoppers: economists fear a slowing Chinese economy could weaken other emerging markets © Qilai Shen/Bloomberg

Investors are taking note. 

Cross-border flows into non-Chinese emerging market debt turned negative for the first time in a year in August, according to the IIF. 

While China was still attracting money then, weekly flows into Chinese equities turned negative in mid-September, potentially presaging softer demand for fixed income as well.

China has been benefiting from inflows triggered by the country’s inclusion in the world’s major bond and equity indices, but Fortun believes such buying is now “largely completed”. 

He expects the third quarter “to be flat in terms of capital flows into [emerging markets]”.

Greer spies other reasons for bond watchers in this category to hide behind their sofas. 

While global growth stutters, fear of inflation is emerging, which could result in a tightening of monetary policies and a “headwind” for riskier assets.

On the plus side, Greer notes that yields are “substantially higher” than in developed markets, an important factor in “an income-hungry world”, while some pockets of the sector such as Russia, Zambia, Ecuador, “have done spectacularly well this year”.

“We get paid for some of the risks, but not all of them,” he says.

Back to work: Ecuador has inoculated the vast majority of people in the Galápagos Islands in an effort to revive the destination’s $350 million-per-year tourism industry © Diaz Arcos/Bloomberg

Smith points to the “fortress-like reserves” many Asian countries have built up since the financial crises of the 1990s, augmented by their share of the $650bn of special drawing rights doled out by the IMF in August.

Moreover, EMs are increasingly borrowing in their own currencies, reducing foreign exchange risk, and current accounts are in better shape now than during the infamous 2013 “taper tantrum” that led to a massive sell-off in the asset class at the time.

Fortun, though, admits there are “things that keep me awake at night” — including the credibility of central bank policy and a lack of fiscal space in over-indebted countries.

“Among DMs, Japan and the UK have proved that you can have fiscal space without [appearing to have] fiscal space, but we don’t know if the same assessment will exist for EMs,” he adds.

What COVID-19 Revealed About Hunger

The pandemic has shown the importance of community-based initiatives in fighting food insecurity. Unfortunately, when the United Nations Food Systems Summit convenes this month, few voices of those most affected by hunger will be at the table.

Brittany Kesselman

JOHANNESBURG – In South Africa, many people struggle to access sufficient quantities of healthy food. 

Because their diets are high in processed foods, refined starch, sugar, and fat, they face a double burden of malnutrition and obesity, or what is known as “hidden hunger.” 

It is hidden because it does not fit the stereotypical image of hunger created by media coverage of famines. 

But it is everywhere.

To be clear, the problem is not a shortage of food. 

In South Africa, hunger is a result of lack of access. 

Getting enough calories and adequate nutrients is largely tied to income. 

Beyond the high cost of healthy food, hidden hunger in the country reflects the limited availability of nutritious products in low-income areas, the cost of energy for cooking and food storage, and lack of access to land for household food production.

The COVID-19 pandemic and the strict measures imposed to contain its spread brought hidden hunger out of hiding, as many people who had been able to afford just enough food to survive suddenly found themselves going without. 

According to one study, 47% of households ran out of money to buy food during the early stages of the initial lockdown in April 2020. 

Job losses, a crackdown on informal vendors, and price increases caused by interruptions in global food and agriculture supply chains all contributed to a sharp rise in food insecurity. 

Images of long lines for emergency food assistance brought the issue into public view. 

Increased levels of child hunger in particular were worrying, but unsurprising, given the abrupt closure of schools and school-based nutrition programs.

The pandemic also made the consequences of hidden hunger more apparent. 

Because adequate nutrition is necessary for a healthy immune system, food-insecure individuals are more likely to become ill. 

Additionally, there is a correlation between the severity of COVID-19 and diabetes, a disease associated with poor diets. 

Data from Cape Town suggest that COVID-19 patients with diabetes were almost four times more likely to be hospitalized and over three times more likely to die from COVID-19 than patients without diabetes.

But while COVID-19 increased food insecurity and highlighted the consequences of hunger, it also produced potential solutions for increasing access to affordable, healthy food. 

In the face of disruptions to global supply chains, more localized food systems began to emerge. 

Where the government failed to implement adequate measures to offset the economic repercussions of lockdowns or the closure of school nutrition programs, civil-society groups sought to fill the void. 

Across South Africa, community action networks sprang up to address hunger, with volunteers providing meals and other assistance to fellow community members.

Around Johannesburg, for example, the C19 People’s Coalition sought to link small-scale farmers who lost access to their usual markets to communities in need of food assistance. 

Unlike most government food packages, which were procured from large corporations and contained nonperishable items with almost no nutritional value, these vegetable packages sought to support the livelihoods of small-scale farmers while also promoting the health of vulnerable households.

And yet the state bears significant responsibility for addressing hidden hunger, particularly in South Africa, where the right to food is enshrined in the constitution. 

And examples from around the world demonstrate what is possible when a committed government works together with civil society to tackle food insecurity.

In Belo Horizonte, Brazil, dubbed “the city that ended hunger,” some of the notable programs include “popular restaurants” that serve thousands of subsidized healthy meals every day; subsidized fruit and vegetable shops; a food bank that salvages food waste and distributes prepared meals to social organizations; and farm stalls to connect small-scale producers directly to urban consumers. 

These and other programs support farmers’ livelihoods and consumer health, while also delivering economic benefits and strengthening communities.

The upcoming United Nations Food Systems Summit claims it will bring together different stakeholders to create more sustainable and equitable food systems, but grassroots movements, academics, and civil-society groups have criticized the summit for bypassing the existing UN Committee on World Food Security to create a new forum tarnished by undue corporate influence, a lack of transparency, and unaccountable decision-making. 

These groups have called for a boycott and are organizing a global counter-mobilization.

The big corporations that are set to dominate the UN summit – seed companies, agrochemical producers, food processors, and retailers – do not have real solutions to hunger. 

Treating food as a commodity to be sold for profit, rather than as a fundamental human right, is precisely what has led to the crisis of hidden hunger. 

Shockingly, South Africa’s largest supermarket chains managed to generate profits during 2020, even as half of the country’s households were unable to afford food. 

Retailers boasted of their food donations while paying their workers – who were designated “essential” – some of the lowest wages in the country.

The real solutions to the crisis of hidden hunger must come from those most affected – the small-scale farmers producing healthy food for their communities and the low-income consumers who struggle to access adequate nutrition. 

These voices have been sidelined from the UN summit, yet the solidarity-based initiatives they created during the pandemic represent the most secure foundation on which to build a more just and resilient food system.

Brittany Kesselman is a postdoctoral research fellow at the Society, Work, and Politics Institute at the University of Witwatersrand.