ukraine war

Russian troops continue to shell and bomb Ukrainian positions in the combat areas and their deep hinterland. Mykolaiv and Kramatorsk fell victim to a massive rocket artillery strike (multiple launch rocket systems with a range of tens of kilometres). The rocket attack damaged, among others, railway infrastructure in Cherkasy and Dnipro, as well as facilities near Brovary in the Kiev Oblast and Kropyvnytskyi. Defenders reported that some enemy rockets were shot down. Delays in the movement of dozens of passenger trains have reached several hours. The information provided by the Ukrainian side from the battle areas is increasingly enigmatic or, as in the case of the situation in the Izyum-Barvinkove-Sloviansk triangle, non-existent.   The Ukrainians point to the increasingly intensive shelling of the border areas of the Chernihiv and Sumy oblasts and the expansion of enemy groupings on the opposite side of the border. Subdivisions of the 90th Tank Division from the Central Military District (MD) are to be developed in the Kursk Oblast, while in the Gomel Oblast the aggressor is increasing the number of air defence systems. Also, the exercises of special forces and electronic warfare subunits, which began in Belarus, are presented in the context of the threat of renewed Russian activity from the north. Kiev fears an armed provocation in this border region.   After a hiatus of nearly two weeks, the General Staff of the Armed Forces of Ukraine provided information on the invader’s personnel problems. Soldiers of the 38th Mechanised Brigade from the 35th Combined Arms Army (CAA) of the Eastern MD were to refuse further participation in the war. In turn, the subunits of the 2nd Army Corps (the so-called Lugansk People’s Militia) of the Southern MD, after being complemented with residents of the villages closest to the combat area, are characterised by a low moral and psychological state, have major problems with their weapons and are not ready to perform their tasks.   According to American data, two of the twelve battalion tactical groups that took part in capturing the city remained in Mariupol (they are supposed to number less than 2,000 soldiers). The remaining units were redeployed to the border of the Zaporizhzhia and Donetsk oblasts, in the area of Velyka Novosilka.   According to Ukrainian military intelligence, the aggressor is escalating the situation in Transnistria to create the appearance of preparing the Russian troops stationed there for an attack and to disperse and tie up the Ukrainian army in the next direction. The personnel of the Russian Army Operations Group in the Transnistrian region does not exceed 300 people, and the combined human potential of the Transnistrian and Russian forces is about 1,400 people. The territory of Transnistria may be useful for establishing supply lines for the invading troops. However, a condition for the success of this plan is the establishment of a land corridor through the southern regions of Ukraine, which, given the effective resistance of the defenders, currently seems unlikely.   The Ukrainian defence ministry has said that a covert mobilisation of unemployed and members of Cossack organisations is underway in the Belgorod and Kursk oblasts and the southern regions of Russia. Former military personnel residing in post-Soviet states are also being sought. They are to be offered to earn at least 200,000 roubles ($3,000) a month.   Over the past 24 hours, the State Emergency Service of Ukraine has demined an area of 396 ha and neutralised 1592 munitions and mines. Since the beginning of the war, 92,909 munitions and 583 kg of explosives, including 1964 aerial bombs, have been neutralised in an area of 17,000 ha.   On 4 May, Spanish law enforcement authorities – following a joint action by the Security Service of Ukraine (SBU) with the Prosecutor General’s Office and foreign partners – detained pro-Russian blogger Anatoly Shariy. In 2021 SBU charged him with treason and acting against national security in the information sphere. There is circumstantial evidence that he collaborated with Russian services. The activities of the Shariy Party were suspended in March. In 2021 Lithuania revoked his refugee status, granted in 2012...read more

The Commander-in-Chief of the Armed Forces of Ukraine, General Valerii Zaluzhnyi, has reported that the defenders have moved to the offensive in the Kharkiv and Izyum directions, where fierce fighting is ongoing. According to the collective reports of the operational commands ‘East’, Combined Forces Operations (in Donbas), ‘South’ and the Air Force Command, the Russians lost within 24 hours: an aircraft, 14 unmanned aerial vehicles, 11 tanks and 14 armoured fighting vehicles, among others. The defence of the Odesa area reported that a winged missile was shot down and a Black Sea Fleet frigate was hit.   The invaders continue to implement the ‘ruble zone’ in the occupied territories, which is intended to weaken the ties of these territories with the Ukrainian economy and create links with the so-called people’s republics and Russia. The announcement of the introduction of the ruble from 1 May has still not been realised – the hryvnia remains in circulation. In Kherson, pensions and social benefits are to continue to be paid by Ukrainian institutions. Russian soldiers, after receiving their pay, exchange roubles for hryvnias in exchange offices. In unofficial circulation, foreign currencies, above all the dollar, are gaining in importance. Difficulties in the rapid introduction of the rouble have led the occupier to announce a four-month transition period allowing payments in Ukrainian currency. During this time, it is planned to open Sbierbank outlets and introduce regulations requiring local entrepreneurs to open ruble accounts with it.   In the Zaporizhzhia Oblast, the Russians are forcing residents to fill in documents on land ownership. On presentation of these, cultivation licences will be issued. Failure to register acreage risks confiscation. Security has been tightened in some Ukrainian cities from 7–10 May as authorities anticipate that rocket fire will increase in connection with Russian Victory Day celebrations. The mayor of Ivano-Frankivsk called on the population to temporarily leave the city and not to gather in public places. In Zaporizhzhia, a stricter curfew was announced, including a ban on movement around the city.   The third stage of the UN-led evacuation of Mariupol has been completed. So far, over 500 civilians have left the city, including 200 people from the embattled Azovstal metallurgical plant. In between transports, aggressor troops are shelling the defended facility. The evacuation is expected to continue on 6 May.   In an interview with the AP news agency, Alexander Lukashenko stated that the Belarusian army would not take part in Russia’s war against Ukraine, and that everything Minsk could and can offer Moscow (logistical security of forces, the possibility of air and missile attacks from Belarusian territory) had already been done. He added that the war could be ended within a week, but this would not happen ‘because of the attitude of the United States and Britain’... read more

Global aluminium prices briefly rallied after news that the United States is considering an effective ban on Russian imports of the metal in response to the conflict in Ukraine. This comes at a time when the LME is also discussing the possibility of banning Russian metal from its warehouses US mulls Russian aluminium ban Metals have been mostly spared in the rounds of sanctions imposed on Russia that followed its invasion of Ukraine on 24 February. The news of a potential US ban has revived memories of the chaos in the aluminium market that ensued when the US administration placed sanctions on Russian aluminium producers in April 2018. Back then, LME prices jumped to their highest level in seven years at $2,718/t, before gradually falling in the following weeks and months. Sanctions were then lifted in January 2019. This time around, while we have seen strength on the back of reports of a possible ban, the gains have been more modest given the lack of confirmation from US officials along with the fact there are several forms of action that could be taken. Three potential scenarios for the US The Biden administration is reportedly weighing up three potential measures: a complete ban on Russian aluminium, increasing tariffs to levels that would effectively act as a ban, and sanctioning the company that produces Russian aluminium: Rusal. The scale of the impact will depend on which of the three options the US opts for. The war in Ukraine has had little effect so far on Russian aluminium exports to the US with most customers likely to have entered into long-term contract agreements. US ban or higher import tariffs – limited impact In the scenario that the US imposes a ban or raises tariffs on Russian aluminium, there will likely be a limited impact on the global market. The US is not a significant buyer of Russian aluminium. The US imported about 192,000 mt of primary aluminium from Russia in 2021, accounting for just over 5% of the total 3.64 million mt of primary aluminium imported that year. Russia was the third-largest exporter of primary aluminium to the US in 2021, but imports from the country were far behind the 2.54 million mt and 354,000 mt shipped from Canada and the United Arab Emirates, respectively. In the first half of this year, the US imported about 120,000 mt of primary aluminium from Russia out of 2.12 million mt in total imports. If the US shuns Russian metals, Russia may increase its exports to sanction-neutral countries like China, the world’s biggest aluminium consumer. China would then buy discounted Russian material to use domestically and export its aluminium products to Europe and the US to fill the gap left by the Russian import ban. China imported 230,511 tonnes of primary aluminium from Russia this year through August, accounting for 77% of its total aluminium imports. Unless a US ban is accompanied by an EU or LME ban, any spike in prices that would follow such a move would most likely be short-lived. Sanctions option more of a concern However, if the US decides to sanction Rusal, the impact could be more severe, bearing in mind the market’s reaction to the sanctions in 2018. The move could freeze the Russian producer out of Western markets, depending on the severity of sanctions, which would boost global prices for the metal and distort global aluminium trade flows. Rusal is the largest aluminium producer outside of China and the only primary aluminium producer in Russia. The company produced 3.76 million tonnes of the metal in 2021, accounting for 6% of worldwide production. Rusal is not only a major producer of primary aluminium. It is also deeply embedded in global supply chains needed to make the metal – bauxite and alumina. Rusal’s 2018 sanctions affected operations in Guinea and Jamaica, while smelters in Europe struggled to secure raw material supplies. The Irish government also considered intervention to safeguard jobs at Rusal Aughinish Alumina, Rusal’s largest producer of alumina. If the US sanctions the Russian aluminium producer, it could make other buyers cautious of taking in Russian material, fearing exposure to possible secondary sanctions. Supply tightness and shortages that would likely follow would be most felt in Europe, where the industry is already grappling with low stock supplies and is more reliant on Russian supply. Europe is Rusal’s biggest customer, accounting for 40% of sales revenues. Buyers have been increasingly pushing back as contracts for next year are being negotiated. Some companies, including Novelis and Norsk Hydro, have already rejected Russian material for next year’s supplies.   US sanctions could also encourage the LME to act – the bourse launched a discussion paper earlier this month on a potential ban of Russian metals. Back in 2018, after sanctions were imposed, the LME barred users from delivering any metal made by Rusal into its global warehouses. This would, as a result, make traders and consumers cautious of buying new metal from Rusal, since they wouldn’t be able to deliver it to the LME – the buyer of last resort. LME discussion on Russian metals The LME is considering three options: it could continue to accept Russian metal, set a cap on Russian metal in LME warehouses, or issue an outright ban. Given that Russia accounts for about 5% of global aluminium output, the metal would be one of the most affected if we were to see a ban or limits on Russian deliveries into LME warehouses. Russian aluminium has accounted for as much as three-quarters of LME stockpiles over the past decade, according to the exchange. Clearly, the LME is worried about the risk of Russian metal being dumped into LME warehouses as buyers become less willing to accept Russian metals for next year’s supplies. Russian metals flow into the exchange’s warehouses, in the scenario that the LME doesn’t issue a ban or only limits Russian deliveries, which would cause some issues. Firstly, a strong increase in LME inventories could put further pressure on prices, while there could also be a growing amount of aluminium in LME warehouses, which buyers are not willing to touch. This could potentially lead to a disconnect in prices. There is already speculation that recent LME inventory increases in copper and aluminium are being driven by Russian material. LME on-warrant aluminium stockpiled jumped 63% so far this week and now stands at 527,675 tonnes, according to data from the bourse, with the increase driven by deliveries into Malaysia’s Port Klang warehouses. On-warrant stockpiles have now doubled since the start of October. A full ban on Russian metals would be the most bullish outcome of the LME discussion paper, effectively cutting Russian metals off from the exchange. With LME disappearing as the market of last resort for Russian metals, Russian suppliers would have to look elsewhere for willing buyers. Disruption to trade flows would likely offer an upside to affected metals, including aluminium. Read this article on THINK TagsRussian metals Aluminium Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Ukraine and Russia used crypto to support war efforts Ukraine has received over $70 million in cryptocurrencies since the start of the Russian-Ukrainian conflict, providing the nation with funds for military equipment and humanitarian assistance. According to blockchain data platform Chainalysis, the majority of the funds came in the form of Ether and Bitcoin. ETH donors led the way with $28.9 million given, while donors of BTC and Tether chipped in $22.8 million and $11.6 million, respectively. Read next: Binance refutes Forbes' accusations, Mi Primer Bitcoin to be available in English | FXMAG.COM The increased reliance on cryptocurrencies in Ukraine looks to have increased adoption in the country, with Ukrainians being the third-highest adopters, behind Vietnam and the Philippines. However, pro-Russian military groups have also used cryptocurrency to crowdfund their war efforts, according to Chainalysis. Coinbase introduces crypto EURO Coinbase has listed Euro Coin (EUROC), the euro-pegged stablecoin introduced by Circle in June 2022. Unlike other euro-pegged stablecoins, such as Stasis Euro (EURS), Euro Tether (EURT), and sEUR (SEUR), EUROC is fully supported by Coinbase. Coinbase also offers varying levels of support for the US dollar stablecoins Tether’s USDT, Maker’s DAI, and Paxos’ PAX, although not all of them are listed on its main exchange. The announcement comes a day after Coinbase suspended trading of the Binance USD (BUSD) stablecoin and on the same day that the company launched its crypto policy advocacy program, Crypto 435.

German Ifo index plunges in June The Ifo index has dropped or more accurately, collapsed, for the second month in a row, suggesting that the rebound of the German economy has ended before it ever really began.   In June, Germany’s most prominent leading indicator, the Ifo index, dropped for the second consecutive month, after a six-months expansion, coming in at 88.5 from 91.7 in May. The weaker-than-hoped-for Chinese reopening, a looming US recession and ongoing monetary policy tightening seem to be weighing on German company sentiment. Also, the growing feeling that Germany is in for a longer period of subdued growth seems to have reached German business. Both the current assessment and the expectations component fell. Expectations are now as low as at the end of last year.   Uncomfortable reality check We still don’t know what the best title for the current German economic situation should be: ‘The Great Decoupling’ or ‘The rebound that never came’ are clear favourites after today’s Ifo index release. Since last year, soft or leading indicators have become rather more 'soft' than 'leading'. Remember that the Ifo index had been on an upward trend since last autumn, while the economy actually shrank by 0.5% quarter-on-quarter in the fourth quarter of 2022 and 0.3% in the first quarter of 2023. An unprecedented war, energy crisis and fiscal stimulus have clearly weakened the relationship between soft and hard data - be it the 50 threshold of PMIs or the trend in other previously reliable indicators like the Ifo index or the European Commission’s economic sentiment index. At the current juncture, all traditional leading indicators have to be taken with a large pinch of salt.   Back to the German economy. What is clear is that the optimism at the start of the year seems to have given way to more of a sense of reality. A drop in purchasing power, thinned-out industrial order books, as well as the impact of the most aggressive monetary policy tightening in decades, and the expected slowdown of the US economy all argue in favour of weak economic activity. On top of these cyclical factors, the ongoing war in Ukraine, demographic changes, and the current energy transition will structurally weigh on the German economy in the coming years. However, all is not bleak. The stuttering Chinese rebound could easily bring some temporary positive surprises as well. Also, the drop in headline inflation and the actual fall in energy and food prices combined with higher wages should support private consumption in the second half of the year.   Today's disappointing Ifo index reading suggests that the hoped-for rebound of the German economy is nothing more than hope. Optimism is fading and the economy faces new growth concerns. We are not saying that the economy will be stuck in recession for the next couple of years, but with several short and long-term challenges, growth will remain subdued at best.

German industrial production drops in May German industry is still stagnating and needs an activity surge in June to avoid an extension of the recession. German industry remains stagnant. In May, industrial production dropped by 0.2% month-on-month, from +0.3% MoM in April. For the year, industrial production was up by 0.7%. Industrial production is still 5% below its pre-pandemic level, more than three years since the start of Covid-19. Production in energy-intensive sectors dropped by 1.4% MoM in April and was down by more than 12% over the year.\   Recession risk remains The optimism at the start of the year seems to have given way to more of a sense of reality. Production expectations have continued to weaken, order books have thinned out significantly despite the May rebound and the inventory build-up is not over, yet. This is a toxic combination, which suggests more industrial disappointments in the months ahead. And if that wasn’t enough, well-known structural factors including the ongoing war in Ukraine, demographic changes and the current energy transition will continue to weigh on the German economy in the coming years. The country’s international competitiveness has deteriorated in recent years and is likely to continue to do so. In a recent study, the German Economic Institute concluded that, even prior to the start of the pandemic, Germany saw net outflows of Foreign Direct Investments. This trend accelerated in 2021 and 2022. All in all, the monthly data for the first two months of the second quarter have not taken away the risk of a further contraction of the German economy. This would make it the first time since 2008 that the economy shrinks for more than two consecutive quarters.

German economy stagnated in the second quarter The flash estimate of German GDP growth shows that the eurozone's largest economy stagnated in the second quarter and seems to be stuck in the twilight zone between stagnation and recession. According to the flash estimate of the German statistical agency, the German economy stagnated in the second quarter. On the year, GDP growth was down by 0.6% or 0.2% if corrected for working days. We advise you to take these numbers with caution as over the last quarters, these flash estimates had been subject to significant revisions. Today, again, the last quarters were slightly revised upwards, without revising away the winter recession. Judging from available monthly data and the comments by the statistical office, it was mainly private consumption which helped the German economy to avoid an extension of the winter recession.   Stuck between stagnation and recession Looking ahead, recently released sentiment indicators do not bode well for economic activity in the coming months. In fact, weak purchasing power, thinned-out industrial order books, as well as the impact of the most aggressive monetary policy tightening in decades, and the expected slowdown of the US economy, all argue in favour of weak economic activity. On top of these cyclical factors, the ongoing war in Ukraine, demographic changes, and the current energy transition will structurally weigh on the German economy in the coming years. However, all is not bleak. The stuttering Chinese rebound could easily bring some temporary positive surprises as well. Also, the drop in headline inflation and the actual fall in energy and food prices combined with higher wages should support private consumption in the second half of the year. We continue to see the German economy being stuck in the twilight zone between stagnation and recession. Today’s German GDP data resembles this economist's favourite football club winning the last match of the season but still being delegated to the second division. It's a victory that does not give rise to celebration.

US The main event for next week will be the Kansas City Fed’s Jackson Hole Symposium.  Fed Chair Powell’s speech will reiterate that more rate hikes might be needed and that rates should stay higher for longer.  With the recent surge with real yields, Fed Chair Powell can acknowledge that policy is restrictive and that future rate cuts could eventually be warranted as long as inflation has been defeated. The economic data starts on Tuesday with the July existing homes sales report, which should show signs of stabilizing.  Wednesday contains the flash PMIs, which could show manufacturing remains in contraction territory and softness with the service sector continues.  On Thursday, we will get both initial jobless claims and the preliminary look at durable goods, which is expected to show weakness in July. Friday contains the release of the final reading of the University of Michigan sentiment report, with most traders wanting to know if inflation expectations had any major revisions. Earnings for the week include results from Baidu, Lowe’s, Nvidia, and Snowflake,   Eurozone As the ECB is poised to continue delivering more rate hikes to combat inflation, the risks of a hard landing are growing.  There’s no shortage of economic releases next week but the one that stands out is the flash PMI readings. The manufacturing sector is clearly going to remain in contraction territory for all the key regions(Germany, France, eurozone), while the service sector steadily weakens, fighting to stay in expansion territory.  Traders will also pay attention to both the German IFO business climate report as that could show expectations might be stabilizing and what should be another soft consumer confidence report. Thin trading conditions in Europe could occur on Tuesday as some banks (France, Italy) are closed for Assumption Day.   UK Next week is mostly about the UK flash PMI survey, as the composite PMI collapse in July is expected to be followed by further weakness in August. The manufacturing PMI is expected to weaken further from 45.3 to 45.0, the service reading to drop from 51.5 to 50.8, while the composite drops from 50.8 to 50.3.   The UK economy is still expected to barely show growth in Q3, but the momentum is fading as the BOE’s rate hiking cycle starts to weigh on the economy.   Russia Following the plunge in the ruble and an emergency rate hike, the focus on Russia will shift back to the war in Ukraine and the BRICS summit.  Russia was having a growing influence in Africa, but that might get tested as President Putin will be absent given his indictment by the ICC. The economic calendar is light with two releases, industrial production data on Wednesday and money supply on Friday.   South Africa The one notable release will be the July inflation report.  Inflation is expected to stay in the SARB’s target range between 3-6%.  The annual headline reading is expected to drop from 5.4% to 4.9%, while the monthly reading rises from 0.2% to 1.0%.  The monthly core reading is also expected to see a rise from 0.4% to 0.6%.   Turkey With inflation out of control, the CBRT is expected to deliver its 3rd straight rise, bringing the 1-week report rate to 19.50%.  The consensus range is to see the rate rise from 17.5% to anywhere between 18.50% and 20.5%. The 19.0% level was a key level in the past as that triggered the sacking of Governor Agbal.   Switzerland Another quiet week with Money supply data released on Monday and export data on Tuesday.   China One sole key economic data to watch will be on Monday, the monetary policy decision on its one-year and five-year loan prime rates that commercial banks used as a benchmark to price corporate, household loans and housing mortgages respectively. After a surprise cut of 15 basis points (bps) on the one-year medium-term lending facility rate to 2.50% last Monday, its lowest level since late 2009 to defuse the potential contagion risk in China’s financial system triggered by a major trust fund that failed to make timely payments to holders of its wealth management products which are backed by unsold properties of indebted property developers; forecasts are now calling for a similar 15 bps cut on the one and five-year loan prime rates to bring it down to 3.4% and 4.05% respectively. Market participants will also be on the lookout for more detailed fiscal stimulus from China’s top policymakers after recent “morale-boosting piecemeal rhetoric measures” that have failed to break the negative feedback loop in the China stock market; the benchmark CSI 300 index has given up all its ex-post Politburo gains from 25 July after the top leadership group promised to implement “counter-cyclical” measures to defuse the deflationary risk spiral in China. For earnings report releases, a couple of major companies to take note of; Sunny Optical Technology (Tuesday), Country Garden Services (Tuesday), China Life Insurance (Thursday), NetEase (Thursday), Meituan (Friday).   India A quiet calendar with only foreign exchange reserves and fortnightly bank loan growth data out on Friday.   Australia Flash Manufacturing and Services PMIs for August will be out on Wednesday.   New Zealand Balance of Trade for July out on Monday is forecasted to shrink to a deficit of -NZ$0.4 billion from a surplus of NZ$9 million posted in June. If it turns out as expected, it will be its first trade deficit since March 2023 due to a weak external demand environment. Q2 retail sales will be out on Wednesday where its prior Q1 negative growth of -4.1% y/y is forecasted to narrow to -0.9% y/y.   Japan Two key data releases to monitor. Firstly, flash Manufacturing and Services PMIs for August out on Wednesday; manufacturing activities are forecasted to improve slightly to 49.9 from 49.6 printed in July while growth in the services sector is expected to come in almost unchanged at 53.6 versus 53.9 in July  Next up, the significant leading Tokyo area consumer inflation data for August out on Friday; both Tokyo core inflation (excluding fresh food) as well as its core-core inflation (excluding fresh food & energy) are forecasted to be unchanged at 3% y/y and 2.5% y/y respectively. Both inflation measures have remained elevated especially the core-core rate which has soared to a 31-year high. Market participants will be keeping a close watch on the USD/JPY as it rallied past a key resistance zone of 145.50/146.10 despite rising concerns on possible BoJ’s FX intervention to negate the current bout of JPY weakness.   Singapore Two key data to focus on. July’s consumer inflation out on Wednesday where the core inflation rate is expected to be almost unchanged at 4.1% y/y versus 4.2% y/y in June. On Friday, industrial production for July is forecasted to show an improvement; -2.5% y/y from -4/9% y/y printed in June. Despite this forecasted improvement, it is still ten consecutive months of negative growth which increases the risk of a recession for Singapore in Q3 due to a weak external demand environment.      

Inflation's second wave: Are we really watching a 70s rerun? Another wave of global inflation is far from inevitable. But there are good reasons to think inflation will be structurally higher and more volatile over the next decade than the last.   Are we heading for a 1970s re-run? Inflation has only been falling for a matter of months across major economies, but the debate surrounding a possible “second wave” is well underway. Social media is littered with charts like the ones below, overlaying the recent inflation wave against the experience of the 1970s. These charts are largely nonsense; the past is not a perfect gauge for the future, especially given the second 1970s wave can be traced back to another huge oil crisis. But central bankers have made no secret that nightmares of that period are shaping today's policy decisions. Policymakers are telling us they plan to keep rates at these elevated levels for quite some time.   Inflation: The 1970s versus today   Rewind 50 years and not only did inflation fail to return to prior lows in either the US or the UK after the initial 1974 spike, but both countries saw at least one additional spike over subsequent years. Germany fared better, but wages did respond to the second oil crisis, helping to push inflation up again.  The lesson was that for a second wave to really take off, you need a catalyst and an economic environment ripe for inflation to take hold. The twin oil price shocks in the 1970s fell on a US economy that was already running hot, a byproduct of persistent US trade and fiscal deficits that grew through the 1960s, aided by the often loose monetary policy of then-Federal Reserve Chair Arthur Burns. That excess demand helped end the Bretton Woods system of fixed currencies and the US dollar lost a quarter of its value between 1970 and mid-1973 as the agreement collapsed, amplifying the hit from higher energy costs. And all of this fell upon an economy that was much more manufacturing-centric than it is today, and it was also heavily unionised. Wage growth typically kept pace with inflation. Back to today, the economy looks very different. But we think there are valuable lessons, and these are our main conclusions:   A second wave isn’t inevitable, but we think there are good reasons to expect inflation to be both structurally higher and more volatile over the next decade. The same is true for central bank rates. The US is less vulnerable to energy shocks than in the 1970s, but further gas price spikes are possible, and that could prompt renewed waves of eurozone inflation. With prices still well above 2021 levels, a shock would likely be smaller. However, a second energy price shock could lead to more pronounced feedback between eurozone wages and inflation. Shortages of metals, be it due to lack of investment or geopolitics, are a growing inflation risk, especially amid the green transition. This probably wouldn’t generate a 2022-style inflation shock by itself, but it is likely to be a source of constant price pressure in future years. Extreme weather is also likely to make food prices more volatile. Unionisation is less widespread than in the 1970s, but there are signs that worker power is increasing amid structural worker shortages. The ability of workers to protect real wages in future inflation shocks is set to grow.  Tighter fiscal and monetary policy should act as a brake on inflation over the short-to-medium-term. Interest rates aren’t likely to return to pre-Covid lows in the foreseeable future, and quantitative easing is unlikely to be used as an economic bazooka. But Covid and the Ukraine war have lowered the bar to big government tax/spending intervention in future crises.   Like the 1970s, inflation is becoming more volatile Source: Macrobond, ING calculations

Food prices Food inflation has started to ease sharply across the developed world, but this is another potential source of risk over the coming decade. Last year showed the cross-dependency of food prices on energy costs, and the ongoing risks associated with the Ukraine war and grain exports. But climate change is also creating increasingly volatile harvests, and the risk is that this results in more protectionism as producing nations seek to protect domestic supply. India’s recent bans on rice exports, and occasional threats of palm oil bans from Indonesia, highlight the risks here. This is a bigger threat to emerging markets, where food can exceed 50% of inflation baskets.   Fiscal support Huge government deficits in the 1970s may not have caused the initial inflation spike, but they undoubtedly amplified it. So, too, did the massive interventions at the start of the Covid pandemic and the “excess savings” pile they helped create. That story is now clearly changing. The US fiscal position is tightening and in the short term, a resumption of student loan repayments is symptomatic of Congress’ reluctance to allow further big spending packages. In the EU, the Stability and Growth Pact – the rules that mandate fiscal responsibility by European governments – is coming back to the fore. As we wrote a few months back, there’s a growing recognition that the rules need to be more flexible, especially when it comes to public investment. However, political uncertainty in the Netherlands and Spain could undermine an agreement on the new rules. In this scenario, and in the absence of yet another activation of the escape clause, eurozone fiscal policies would become more restrictive.  That said, after a decade of austerity and ultra-low interest rates, particularly in Europe, the lesson from both the pandemic and the Ukraine War is that fiscal policy can be a powerful lever. Met with a fresh, unexpected shock, we suspect the bar to another large fiscal intervention is lower than it might have been in the 2010s.

Food prices Food inflation has started to ease sharply across the developed world, but this is another potential source of risk over the coming decade. Last year showed the cross-dependency of food prices on energy costs, and the ongoing risks associated with the Ukraine war and grain exports. But climate change is also creating increasingly volatile harvests, and the risk is that this results in more protectionism as producing nations seek to protect domestic supply. India’s recent bans on rice exports, and occasional threats of palm oil bans from Indonesia, highlight the risks here. This is a bigger threat to emerging markets, where food can exceed 50% of inflation baskets.    

Fiscal support Huge government deficits in the 1970s may not have caused the initial inflation spike, but they undoubtedly amplified it. So, too, did the massive interventions at the start of the Covid pandemic and the “excess savings” pile they helped create. That story is now clearly changing. The US fiscal position is tightening and in the short term, a resumption of student loan repayments is symptomatic of Congress’ reluctance to allow further big spending packages. In the EU, the Stability and Growth Pact – the rules that mandate fiscal responsibility by European governments – is coming back to the fore. As we wrote a few months back, there’s a growing recognition that the rules need to be more flexible, especially when it comes to public investment. However, political uncertainty in the Netherlands and Spain could undermine an agreement on the new rules. In this scenario, and in the absence of yet another activation of the escape clause, eurozone fiscal policies would become more restrictive. That said, after a decade of austerity and ultra-low interest rates, particularly in Europe, the lesson from both the pandemic and the Ukraine War is that fiscal policy can be a powerful lever. Met with a fresh, unexpected shock, we suspect the bar to another large fiscal intervention is lower than it might have been in the 2010s.   Worker power and unionisation Trade unions were a powerful force in the 1970s, a sharp contrast to what we see today. The share of employees who are members of trade unions has decreased markedly, a trend that’s gone hand-in-hand with the decline of manufacturing across the West.       But we need to make a distinction between trade union membership (which is generally low in Europe, at least according to official data) and collective bargaining coverage. The latter is the proportion of employees whose wages are centrally negotiated, and in Europe, that’s often in excess of 90% and has typically changed much less since the 1980s. Negotiated wage growth is the highest in 30 years, albeit it has tracked well below headline inflation, and this looks more like a "catch-up" than any kind of wage-price spiral. Even in countries where collective bargaining is unusual (the US and UK), there are hints that worker power is growing. On a one-year rolling basis, the number of strike days is at its highest level since at least the early 2000s in the UK and US. That doesn’t mean union membership is increasing per se, not least because the power of trade unions under law in the likes of the US and UK has reduced over time. But it does suggest workers feel they can push for inflation-busting pay rises.       In short, regardless of whether unionisation increases over the coming years, the pandemic has shown that wage growth can still rise quickly if there are widespread worker shortages. This is changing, and most countries have seen participation rates return to pre-Covid levels. And even where they haven’t (as in the UK), there are signs that worker supply is improving. We think economic slack will increase as rate hikes increasingly begin to bite. Still, the pandemic also gave us a flavour of how the ageing populations we see in many developed economies could actually be inflationary in the medium term. In the US in particular, we saw millions of people retire in a very short amount of time. And that undoubtedly contributed to worker shortages which fed through to higher wage growth. Many economies were already starting to see this in certain industries (e.g. long-distance lorry driving) before Covid-19, and worker shortages are likely to become a persistent issue over the coming years. The ability of workers to protect real wages in future inflation shocks may well increase. That said, it’s possible that some of the labour scarcity associated with ageing will be countered by technological advances, not least Artificial Intelligence.