The writer is global head of commodities research at Goldman Sachs
It is tempting to blame today’s shortages in the “old economy” — everything from energy to other basic materials, and even agriculture — on a series of temporary disruptions driven largely by the Covid-19 pandemic.
But outside of a few labour issues, these bottlenecks have little to do with Covid. Instead, the roots of today’s commodity crunch can be traced back to the aftermath of the financial crisis and the following decade of falling returns and chronic under-investment in the old economy.
As infrastructure aged and investment waned, so did the old economy’s ability to supply and deliver the commodities underpinning many finished goods. After years of neglect, today’s rising gas prices, copper supply shortfalls and China’s struggles with power generation are the “old economy’s revenge”.
In the economic stagnation following 2008, policymakers focused recovery efforts via central bank quantitative easing programmes to support markets. Lower-income households faced sluggish real wage growth, economic insecurity, tighter credit limits and increasingly unaffordable assets. Higher-income households, on the other hand, benefited from the financial asset inflation caused by QE.
This disparity in outcomes hit the old economy hard. In the old economy, price appreciation results when the volume of demand outstrips the volume of supply. Higher-income households may control the dollars, but lower-income households control the volume of commodity demand given their greater number and propensity to consume physical goods over services.
As the volume of demand for commodities waned, so did the returns for old economy sectors. Lower returns led to less long-cycle old economy capital expenditure — which traditionally requires a five to 10-year horizon of sufficient demand — in favour of short-cycle “new economy” in investment in areas such as technology.
By 2013, this weakness backed up into China. As the world’s manufacturing engine slowed and commodities began their historic slide, the old economy’s capital flight intensified.
Indeed, the old economy was overbuilt, debt-laden and over-polluted. While the old economy only represents about 35 per cent of global gross domestic product, it generated at least 2 times the corporate losses, had about 90 per cent of the non-financial debt and created 80 per cent of the emissions. It is no wonder why investors preferred Big Tech to oil and copper.
After the oil price collapsed in 2015, markets were fed up with wealth destruction, nearly halting deal flows across the old economy. China stopped aggressively stimulating lossmaking enterprises such as coal mines. And as climate change became top of mind, investors put greater weight on environmental, social and governance issues, further restricting capital.
The resulting decline in investment prevented capacity growth in commodities. This has been particularly the case in hydrocarbons where divestiture by investors for ESG reasons compounded an already growing under-investment problem.
The severity of these supply constraints has been underlined as countries have moved into recovery mode from the pandemic, exposing just how stretched the old economy has become.
The pandemic also had a further effect, placing social needs more at the centre of policymakers’ agendas. Such inclusive growth has only accentuated the demand for physical commodities.
Shocks to one part of the system are now creating ripple effects elsewhere. Reduced coal output in China hit aluminium smelting capacity, creating shortages in aluminium. Reduced gas availability forced gas-to-oil substitution, generating shortages in oil. The rolling impact of smaller, frequent shocks on a stretched system generates the emergent phenomenon in which transitory shocks lead to persistent physical price inflation — the start of which we are seeing today.
This is where the revenge of the old economy will leave its mark. Periods of commodity price pressure will reoccur as broad-based demand meets inadequate infrastructure.
If policymakers’ goals of broad-based prosperity and a massive buildout in green infrastructure are to be met, commodity prices will need to significantly overshoot to the upside to provide the incentive for investment. This is needed to compensate for the growing risks involved in long-cycle capex projects and the inherent complexities surrounding the green energy transition. As we argued a year ago, a new commodity supercycle is upon us.
Afghan Economy Nears Collapse as Pressure Builds to Ease U.S. Sanctions – The New York Times
Afghanistan’s economy has crashed since the Taliban seized power, plunging the country into one of the world’s worst humanitarian crisis.
MAZAR-I-SHARIF, Afghanistan — Racing down the cratered highways at dawn, Mohammad Rasool knew his 9-year-old daughter was running out of time.
She had been battling pneumonia for two weeks and he had run out of cash to buy her medicine after the bank in his rural town closed. So he used his last few dollars on a taxi to Mazar-i-Sharif, a city in Afghanistan’s north, and joined an unruly mob of men clambering to get inside the last functioning bank for hundreds of miles.
Then at 3 p.m., a teller yelled at the crowd to go home: There was no cash left at the bank.
“I have the money in my account, it’s right there,” said Mr. Rasool, 56. “What will I do now?”
Three months into the Taliban’s rule, Afghanistan’s economy has all but collapsed, plunging the country into one of the world’s worst humanitarian crises. Millions of dollars of aid that once propped up the previous government has vanished, billions in state assets are frozen and economic sanctions have isolated the new government from the global banking system.
Now, Afghanistan faces a dire cash shortage that has crippled banks and businesses, sent food and fuel prices soaring, and triggered a devastating hunger crisis. Earlier this month, the World Health Organization warned that around 3.2 million children were likely to suffer from acute malnutrition in Afghanistan by the end of the year — one million of whom at risk of dying as temperatures drop.
No corner of Afghanistan has been left untouched.
In the capital, desperate families have hawked furniture on the side of the road in exchange for food. Across other major cities, public hospitals do not have the money to buy badly needed medical supplies or to pay doctors and nurses, some of who have left their posts. Rural clinics are overrun with feeble children, whose parents cannot afford food. Economic migrants have flocked to the Iranian and Pakistani borders.
As the country edges to the brink of collapse, the international community is scrambling to resolve a politically and legally fraught dilemma: How can it meet its humanitarian obligations without bolstering the new regime or putting money directly into the Taliban’s hands?
In recent weeks, the United States and the European Union have pledged to provide $1.29 billion more in aid to Afghanistan and to Afghan refugees in neighboring countries. But aid can do only so much to fend off a humanitarian catastrophe if the economy continues to crumble, economists and aid organizations warn.
“No humanitarian crisis scan be managed by humanitarian support only,” said Abdallah Al Dardari, the United Nations Development Program’s resident representative in Afghanistan. “If we lose these systems in the next few months, it will not be easy to rebuild them to serve the essential needs of the country. We are witnessing a rapid deterioration to the point of no return.”
Under the previous government, foreign aid accounted for around 45 percent of the country’s G.D.P. and funded 75 percent of the government’s budget, including health and education services.
But after the Taliban seized power, the Biden administration froze the country’s $9.5 billion in foreign reserves and stopped sending the shipments of U.S. dollars upon which Afghanistan’s central bank relied.
The scale and speed of the collapse amounts to one of the largest economic shocks any country has experienced in recent history, economists say. Last month, the International Monetary Fund warned that the economy is set to contract up to 30 percent this year.
Thousands of government employees, including doctors and teachers, have gone months without pay. The wartime economy that employed millions and propped up the private sector has come sputtering to a halt.
By the middle of next year, as much as 97 percent of the Afghan population could sink below the poverty line, according to an analysis by the United Nations Development Program. Many people who were already living hand-to-mouth have been pushed over the edge.
One October morning in Mazar-i-Sharif, dozens of men gathered downtown, carrying shovels cobbled together with rough wood and rusted metal.
For years, day laborers have gathered there to pick up work digging wells, irrigating fields of cotton and grain, or doing construction around the city. The pay was modest — a couple dollars a day — but enough to buy food for their families and pay other small bills. These days, though, the men stay at the square until sunset hoping for even one day of work a week. Most cannot even afford to buy bread during lunch.
“There was work one day — and then suddenly there wasn’t,” said Rahmad, 46, standing in the crowd. “It was so sudden I didn’t have time to plan or save money or anything.”
Even before the Taliban takeover, Afghanistan’s fragile economy was wracked by slow growth, corruption, deep poverty and a severe drought.
Afghanistan has long been dependent on imports for basic foods, fuel and manufactured goods, a lifeline that was severed after neighboring countries closed their borders during the Taliban’s military campaign this summer. Trade disruptions have since caused shortages of crucial goods, like medicine, while the collapse of financial services has strangled traders who rely on U.S. dollars and bank loans for imports.
At the Hairatan port along the Afghanistan-Uzbekistan border, a team of workers unloaded flour bags from a shipping container into trucks, sending clouds of white specks into the air. Since August, their company has slashed its imports in half; people can no longer afford basic goods.
At the same time, the cost of doing business soared. Customs and traffic officers, who have gone unpaid for months, are asking for more in bribes, according to a manager for the company, the Bashir Navid Group.
Understand the Taliban Takeover in Afghanistan
Who are the Taliban? The Taliban arose in 1994 amid the turmoil that came after the withdrawal of Soviet forces from Afghanistan in 1989. They used brutal public punishments, including floggings, amputations and mass executions, to enforce their rules. Here’s more on their origin story and their record as rulers.
“Everything is disorganized,” the manager, Mohammad Wazir Shirjan, 50, said. “Everyone is completely frustrated.”
To avoid a complete currency collapse, the Taliban limited bank withdrawals to first $200 and then $400 a week and have appealed to China, Pakistan, Qatar and Turkey to fill its budget hole, which is billions of dollars large. So far, none have offered the financial backstop that Western donors provided to the former government.
The Taliban have also pressed the United States to release its chokehold on the country’s finances or risk a famine, as well as Afghan migrants flooding into Europe in search of work.
“The humanitarian crisis we have now is the result of those frozen assets. Our people are suffering,” Ahmad Wali Haqmal, a spokesperson for the Ministry of Finance, said in an interview.
In late September, the Biden administration issued two sanctions exemptions for humanitarian organizations to ease the flow of aid, and it is considering additional adjustments, according to humanitarian officials involved in those negotiations. But those exemptions do not apply to paying employees like teachers in government-run schools and doctors in state hospitals, and the decision not to include them risks the collapse of public services and a further exodus of educated professionals from the country, humanitarians say.
And the scope of the exemptions is limited in other ways. Many foreign banks that aid organizations rely on to transfer funds into Afghanistan have cut ties to Afghan banks for fear of running afoul of sanctions. And the liquidity crisis severely restrains the amount that organizations can withdraw to pay vendors or aid workers.
“The current economic restrictions and sanctions policy, if maintained and not adjusted, are on track to hurt the Afghan people — through deprivation and famine — more than the Taliban’s brutalities and poor governance,” said John Sifton, the Asia advocacy director at Human Rights Watch.
Already in hospitals across the country are signs of a hunger crisis that could overwhelm the fragile health care system.
In a malnutrition ward of a hospital in southern Afghanistan, Shukria, 40, sat with her 1-year-old grandson, Mahtab, his mouth craned open but body too weak to let out a cry.
For weeks, the boy’s father had come home empty-handed from his mechanic shop as business dried up, and the family resorted to bread and tea for every meal. Soon his mother stopped producing milk to breastfeed, so she and Shukria supplemented his diet with milk from their family’s goat. But when they ran out of cash to buy food, they sold the animal.
“I’ve been asking this hospital to give me work,” Shukria said. “Otherwise after a week, a month, he will just end up sick and back here.”
Kiana Hayeri contributed reporting from Mazar-I-Sharif, and Yaqoob Akbary from Kandahar.
Charting Global Economy: Latin America at Top of Inflation Wave – BNN
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While prices are rising all over the world, the increases are especially striking in Latin America, which has the highest inflation forecast for both this year and next.
U.S. and U.K. inflation metrics recorded multi-decade highs, while big price jumps in New Zealand led the central bank to raise interest rates for the second time in as many months. India’s economy is showing signs of strengthening, while an increase in Covid-19 infections is denting business sentiment in Germany.
Here are some of the charts that appeared on Bloomberg this week on the latest developments in the global economy:
Personal spending rose in October from a month earlier by the most since March, while a closely watched inflation measure posted the largest annual increase in three decades. The figures come as some Federal Reserve officials are advocating for a faster tapering of the central bank’s asset-purchase program than initially planned.
The supply crunch that’s helped drive inflation to multi-decade highs shows some signs of easing in the U.S. -– but it’s still getting worse in Europe.
Applications for U.S. state unemployment benefits plunged last week to a level not seen since 1969, which if sustained would mark the next milestone in the labor market’s uneven recovery. However, the larger-than-expected drop was largely explained by how the government adjusts the raw data for seasonal swings.
German business confidence took another hit in November, with a new wave of Covid-19 infections looming over the economy and rising inflationary pressures threatening to weigh on manufacturing. Expectations for the next half year also worsened.
U.K. companies reported the strongest inflation in more than two decades during November, adding to pressure on the Bank of England to lift interest rates as early as this month. IHS Markit Ltd. said 63% of purchasing managers reported increased cost burdens, driving the fastest growth in an index tracking inflation since the report started in 1998.
Singapore expects gross domestic product to expand 3% to 5% next year, a slower pace than this year as its rebound from the worst of the pandemic steadies. The first official forecast for 2022 compares with about 7% this year, the Ministry of Trade and Industry said Wednesday, reflecting the impact from easing pandemic restrictions and a stabilizing global economy.
China pulled back on its already halting progress toward meeting its U.S. trade deal targets, slowing purchases of all types of goods covered by the agreement despite calls from the Biden administration for Beijing to adhere to its commitments.
Price surges are busting through policy makers’ targets in all of Latin America’s major economies, with annual inflation prints this month of 6% in Chile, 10.7% in Brazil and a whopping 52% in Argentina. Consumer prices in Mexico rose 7.05% in the first half of November from a year prior, the highest in 20 years.
India’s economy showed steady signs of strengthening in October as services, manufacturing and exports kept it on course to post the world’s fastest growth.
New Zealand’s central bank raised interest rates for the second time in two months and signaled it will need to tighten policy more quickly than previously expected to contain inflation.
©2021 Bloomberg L.P.
What's Happening in the World Economy: Virus Fears Return – Bloomberg
Hello. Today we look at how coronavirus fears are rising again after the discovery of a new variant, the state of China’s economy and concerns about the outlook for trade.
Inflation, central bank tapering, supply chain snarls, a looming fiscal cliff — they all dropped a notch on the global economy’s list of concerns Friday as the Coronavirus shot back to the top.
A new variant called B.1.1.529 has been identified in South Africa and has already spread as far as Hong Kong, where it infected two travelers in hotel quarantine. See here for more details.
Stocks, Treasury yields and oil sank while the yen jumped — all hallmarks of investors bracing for uncertain economic times.
“What was expected to be another quiet day for markets, as U.S. activity is muted, is now likely to be rife with anxiety over the new variant and its implications for economic activity going forward,” Siobhan Redford, a Johannesburg-based analyst at FirstRand Bank, told clients in a report.
For South Africa’s economy, the news is a particular body blow especially for its already shaky tourism sector, which would have been eager to welcome foreigners chasing winter sun. The European Union, U.K. and Singapore have already curbed travel.
More broadly, there will be fears the new strain could fuel outbreaks in more countries, stretching health systems, potentially evading vaccines and complicating efforts to reopen economies and borders. The concern alone could dampen the confidence of consumers and companies, which had been showing signs of picking up.
Money markets are offloading bets on central bank interest-rate hikes in a hurry, as inflation fears give way to concerns that the variant may spread globally.
If contained, the new as-yet unnamed strain may prove to be just a scare for markets. The coming days and decisions from the World Health Organization will be closely watched for any broader spread.
At a minimum, however, it’s yet another reminder that Covid-19 is going to remain the wild card for the global economy and will continue to shape the recovery and what policy makers do next.
“Each new variant entails the risk of the vaccination progress being undone,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank. “The thoughts of a world post-Covid suddenly become all confused.”
The Economic Scene
China’s economy continued to slow in November with car and homes sales dropping again as the housing market crisis dragged on.
That’s the outlook from Bloomberg’s aggregate index of eight early indicators for this month. While the overall number stayed unchanged, under the surface there was a further deterioration in some of the real-time economic data.
Today’s Must Reads
- Thanksgiving binge | E-commerce spending by U.S. consumers on Thanksgiving Day will probably climb to a record, even though sales may not be as strong as initially expected.
- Supply chain worries | There’s limited evidence from U.S. companies that any major shift in inflation expectations is yet underway despite what economists and President Joe Biden are saying.
- Spending surge | Australian retailers recorded their best month of sales in nearly a year as consumers splashed out on everything from dining out to clothing, taking advantage of the easing of lockdowns.
- European stimulus | The future of European Central Bank stimulus is becoming clearer before December’s crunch meeting, with its pandemic bond-buying tool on track to be wound down but stay available
- Japan stimulus | Prime Minister Fumio Kishida delivered his first extra budget, funding Japan’s biggest-ever fiscal package, as he tries to secure an economic recovery before next year’s elections.
- El Salvador crypto | Bank of England Governor Andrew Bailey said the country’s decision to adopt Bitcoin as its currency was concerning because consumers probably will be caught out by its volatility.
“Faintly in the distance: the contours of a big export slump are becoming visible.”
That’s the ominous warning from HSBC’s co-head of Asian economic research Frederic Neumann in a research note. He notes that export volumes have contracted in recent months and new export orders are declining. And that’s set to continue as the shift away from goods demand towards services will knock down shipments from Asia.
“After powering through the pandemic, a trade hangover now looms,” he says.
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