US Failure to Implement Global Minimum Tax Could Be Costly

A breakthrough agreement announced by Senate Democrats on Wednesday, which would dedicate hundreds of billions of dollars to addressing climate change and other Democratic priorities, is designed to raise federal revenues by increasing taxes on wealthy Americans and large corporations. But the agreement sidesteps an international tax agreement brokered by the Biden administration.

That agreement, which is meant to require large multinational companies to pay taxes in the countries where they do business and to pay a global minimum of 15% on profits worldwide, is opposed by Senator Joe Manchin, the conservative Democrat who has withheld his vote on a number of the Biden administration’s priorities. Manchin said he is concerned that U.S. companies will be placed at a disadvantage if the U.S. implements the law and other countries do not.

The 15% global minimum tax is distinct from a 15% minimum tax on corporations that is reportedly in the deal that Manchin struck with Senate Majority Leader Chuck Schumer.

The agreement in the new proposed deal applies to “taxable income” and takes many deductions and adjustments into account. The international deal applies to “book income,” which corporations report on financial statements to shareholders and is typically a much larger figure. 

Ironically, the failure to implement the law could harm U.S. tax revenues while doing little to benefit companies based here. A provision in the agreement allows other countries to impose additional taxes on multinational corporations if their home countries do not tax their profits at a minimum rate of 15%. 

According to Congress’s Joint Committee on Taxation, if the U.S. were to adopt the agreement and implement that rule, the Internal Revenue Service would collect an additional $23 billion in 2023, and nearly $319 billion in the 10 years ending in 2032. The committee says failure to adopt the rule could mean those revenues flow to other countries’ treasuries. 

Adoption slow

The U.S. is not the only country slow in adopting the new rules. European Union negotiations over implementation recently hit a snag when Hungary declared itself unwilling to raise taxes on its domestic corporations. The United Kingdom and Japan have drafted implementation guidelines, but they are not yet official. 

The overwhelming majority of countries that signed on to the accord have still not taken steps to actually put it in place. 

“This entire process has been very uncertain and difficult to predict,” Will McBride, vice president of federal tax and economic policy at the Tax Foundation, told VOA. “It’s actually introduced a lot of uncertainty into international tax, although it was initially pitched, and continues to be pitched, as a way to create certainty for taxpayers.” 

135-country agreement

The global minimum tax is part of a larger international taxation framework developed under the auspices of the Organization for Economic Cooperation and Development and the G-20 group of large economies. The deal brought together more than 135 countries in an effort to control “base erosion and profit shifting,” known by the acronym BEPS.  

BEPS refers to tax strategies employed by multinational corporations. The practice involves strategically placing operations in low-tax jurisdictions, thereby eroding the tax “base” of their home countries, and then “shifting” profits earned internationally so that they are paid in those low-tax jurisdictions.  

The OECD estimates that as much as $240 billion in global tax revenue is lost to BEPS every year.  

Two pillar

The agreement, finalized in 2021, has two pillars. The first includes a mechanism for allocating a share of large multinational corporations’ profits to the countries where their products and services are actually consumed, preventing those profits from being booked in tax haven countries. 

The second pillar includes a 15% minimum tax rate on those profits across all countries in the agreement. The pillar also contains a mechanism meant to prevent participating countries from reducing their tax rates in order to attract companies to their shores. If a country does not tax corporate profits earned within its borders at 15%, other countries have the ability to “top up” their tax assessments of those companies in order to bring its total tax rate up to 15%.  

The thinking behind the design is that it eliminates the benefits a corporation gets from moving to a low-tax country, while simultaneously encouraging governments around the world to adopt the 15% rule, because if they do not, other governments will collect the additional taxes anyway. 

“Under Pillar Two, it’s the country of residence that gets the first crack at taxing the foreign income of their multinationals,” Thornton Matheson, a senior fellow at the Urban-Brookings Tax Policy Center, told VOA. “But if they don’t do that, then the countries in which they operate can effectively tax their subsidiaries as if they were subject to such a rule.” 

“If the European countries were all applying this, it could undermine U.S. revenues,” she said, adding that such a situation would create an incentive for the U.S. to put the agreement into force. 

Doubts about effectiveness

Some experts remain doubtful that the global minimum tax, even if it were adopted universally, would actually end the practice of countries using financial incentives to attract corporations to their jurisdictions. 

Gary Clyde Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics, told VOA that even with a 15% minimum tax in place and strictly enforced, there are a multitude of ways that governments can deliver other benefits that offset that burden. 

As an example, he pointed to the legislation currently working its way through Congress that would provide billions in subsidies and tax credits to the semiconductor industry in order to spur growth in U.S.-based production. 

“If you have a minimum tax of 15%, and then give $50 billion plus $24 billion of tax credits to semiconductor companies, what does that tell you? To me as an economist, that’s a negative tax. And other countries will do the same for industries that they regard as critical to their security or livelihood, or whatever the rationale is,” he said.

McBride of the Washington-based Tax Foundation noted that the agreement has an explicit carve-out that prevents direct subsidies from being counted as an offset to a company’s tax burden. 

“It actually incentivizes countries … to go with direct subsidies as a way to attract companies,” he said. 

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US Economy Shrinks for Second Straight Quarter

The U.S. economy shrank for a second straight quarter from April to June, dropping at an annual pace of nine-tenths of a percentage point and by one common measurement pushing the world’s biggest economy into a recession.

The Commerce Department reported the decline in the gross domestic product – the broadest gauge of the American economy – on Thursday. It followed a 1.6% annual drop in the January-to-March period.

Some economists view two successive quarters of declining growth as an indication of a recession, but others say such a declaration is too simple. They are pointing to seemingly contradictory aspects of the U.S. economy – with hundreds of thousands of new jobs being added each month and the unemployment rate at a nearly 50-year low of 3.6%, even as inflation in consumer prices surges at the fastest pace in four decades.

Mark Hamrick, a senior economic analyst at, said, “We now know that the economy has contracted for two consecutive quarters. It is not entirely clear whether a recession has begun given the continued strength of the job market.”

He said that eventually “the recession question will be answered by the National Bureau of Economic Research. This first attempt to capture economic output in the second quarter should be taken with more than the proverbial grain of salt since there will be revisions.”

The economic report came a day after the U.S. central bank, the Federal Reserve, boosted its benchmark interest rate by three-quarters of a percentage point in an ongoing effort to curb soaring consumer prices. Fed chairman Jerome Powell said “another unusually large increase could be appropriate” at the central bank’s September meeting.  

“Recent indicators of spending and production have softened,” the Fed said in announcing the rate increase. “Nonetheless, job gains have been robust in recent months.”

Powell said at a Wednesday news conference, “Our goal is to bring inflation down and have a so-called soft landing, by which I mean a landing that doesn’t require a significant increase in unemployment. We understand that’s going to be quite challenging. It’s gotten more challenging in recent months.”

The slowing U.S. economy, whether officially in a recession or not, also has crucial political implications. Ahead of the Commerce Department report, U.S. President Joe Biden said this week he does not believe the economy is in a recession or headed to one.

But opposition Republicans are certain to cast the economy as in a recession and blame Biden’s economic stewardship ahead of national congressional elections in November when Republicans are hoping to retake control of one or both houses of Congress from the president’s Democratic colleagues.

Thursday’s estimate of the gross domestic product for the April-June quarter is the first of three the government will release over the coming weeks. It marked a sharp weakening from the 5.7% growth the economy achieved last year when the economy rapidly recovered from the effects of the coronavirus pandemic. That was the fastest yearly expansion since 1984.

The quarterly decline included pluses and minuses in the national economy.

Consumer spending, which covers 70% of the U.S. economy, rose 1% on an annualized basis, a marked slowdown from previous quarters. Home construction dropped 14%, while business construction fell 11.7% on an annualized basis and federal government spending declined by 3.2%.

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China to Aid Developers as Homebuyers Boycott Mortgages

Chinese authorities are promising to establish an initial rescue fund of $11.8 billion (80 billion yuan) to offset a looming crisis in the real estate sector, where homebuyers routinely purchase residences from developers’ plans and begin making mortgage payments before the dwellings are finished. 

By having customers purchase homes “off plan,” builders can receive construction financing and shift risks — such as costly pandemic-related supply chain delays and bankrupt builders — to the middle-class homebuyers. 

For many buyers, the risks seemed worth it. But then China’s COVID-cooled economy strained many family budgets, and draconian lockdowns stalled work on residential projects. As home prices fell, some buyers found themselves paying mortgages on properties worth less than what they had agreed to pay. That was followed by the tightening policies in August 2020, when the central government realized real estate developers’ debt was getting out of control, and draconian lockdowns stalled work on residential projects. 

Amid all this, many homebuyers announced they would stop making mortgage payments to banks until work resumed on unfinished projects. 

Experts say the boycott is a byproduct of two decades of insufficient oversight over a red-hot real estate sector. One economist likened the situation to a Ponzi scheme, a type of fraud that pays existing investors with funds collected from new investors. 

Reuters describes the promised rescue fund as the first step in creating a “war chest” of as much as $44 billion (300 billion yuan). The state hopes the effort, announced Sunday, will not only help property developers resolve a debt crisis but also restore confidence in the real estate sector. 

A state bank official who declined to be named due to the sensitivity of the matter told Reuters that the fund would initially be set at 80 billion yuan through People’s Bank of China and China Construction Bank. 

High risks, low supervision

Mr. Fang, a real estate developer in China and the United States who asked that VOA Mandarin not use his real name for fear of reprisal, said while U.S. banks supervise and control loans issued to off-plan property developers from groundbreaking to occupancy, Chinese banks offer less supervision. 

According to China’s presale housing regulation, funds received from sales of homes must be used to build them, a process supervised by the Ministry of Housing and Urban-Rural Development and banks.

In practice, however, poor supervision is common, according to Fang. 

In this environment, Chinese developers “want to take big risks,” Fang said. 

Instead of putting buyers’ mortgage payments toward construction of their homes, Fang said, Chinese developers buy more property. 

With the economy and housing market cooling off, it is “basically suicidal” to buy more land on the assumption that developing it will pay for finishing construction underway elsewhere, Fang said. 

‘A bit like a Ponzi scheme’

An economist in China, who requested anonymity due to fear of reprisal, told VOA Mandarin that real estate companies have never been regulated. 

“When the economy is good, with the continuous expansion, most of the properties can be delivered. But when the economy is not good, it becomes a bit like a Ponzi scheme. If there is no follow-up funding, they will not able to complete construction,” she said. 

A Chinese banking regulator said on July 21 that it will coordinate support to property developers in need of loans after homebuyers stopped making mortgage payments, usually putting the money into escrow accounts instead. 

At a press conference in Beijing last Thursday, Liu Zhongrui, director of the Statistical Information and Risk Monitoring Department of the China Banking and Insurance Regulatory Commission (CBIRC), said that banks and other government departments will meet reasonable financing needs of real estate developers. But he did not give details. 

“We actively strengthen the coordination and cooperation with the Ministry of Housing and Urban-Rural Development, the People’s Bank of China and other departments, and support local governments to more effectively promote the work of ‘guaranteeing the delivery of buildings, protecting people’s livelihood, and maintaining stability,'” Liu said. 

The earliest “mortgage boycott notice” by more than 5,000 homebuyers appeared in April 2021 in Taiyuan, in the northern province of Shanxi, after a local developer’s project languished unfinished for more than two years. 

Letters to banks

Last month, homeowners in Jingdezhen, in northeastern Jiangxi province, sent a letter to their banks announcing they were suspending mortgage payments because of the delayed delivery of residential units purchased off plan. Since then, homeowners of more than 300 unfinished residential projects nationwide have sent similar public letters to banks. 

Last week, some 200 frustrated home buyers in Wuhan demonstrated outside a bank regulator’s office, according to an article in The Wall Street Journal. 

It’s unclear how many homebuyers are involved in the protests because Chinese censors are clamping down on news of mortgage boycotts, Reuters reported.

A study, the “2022 National Unfinished Building Research Report,” published July 18 by the Shanghai-based E-House China Research and Development Institution, a think tank that analyzes the real estate market, found that 54% of homeowners who issued mortgage suspension notices came from the central China province of Henan, home to a billion-dollar banking scandal.

According to the report, the value of mortgage loans involving unfinished buildings nationwide was $133.2 billion (900 billion yuan) in the first half of 2022, accounting for 1.7% of the national mortgage balance. 

“This industry is a mess, and no one used this kind of quantitative analysis to analyze it before,” Yan Yuejin, the report’s author and the think tank’s director of research, told VOA Mandarin. 

Although 1.7% does not sound high, it is already very high and poses a serious risk for banks, Yan said. “The banks’ tolerance rate for this [kind of] nonperforming loan … should not exceed 1%.”

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US Central Bank Expected to Raise Interest Rates  

The U.S. Federal Reserve is expected to impose a second major interest rate increase Wednesday in an effort to combat soaring inflation.

Observers say the central bank will likely announce an interest rate hike of three-quarters of one percentage point. The expected rate hike would be similar to one last month — the biggest boost in nearly three decades as the U.S. inflation rate soared to an annual rate of 8.6%, the highest in 40 years.

The U.S. economy has seen rising demand for goods and services among consumers as the global COVID-19 pandemic has steadily waned. But that has also led to the rising cost of most commonly used items, such as gasoline, food and clothing, as well as major items like cars, appliances and furniture.

The decision by the Federal Reserve to increase the interest rate consumers pay to borrow money is aimed at lowering such demand, which could help lower prices and bring inflation back down to the central bank’s target rate of 2% per year — but without pushing too far and causing a recession, which could lead to job losses and more economic pain.

All three major U.S. stock indices closed lower Tuesday after giant retailer Walmart cut its profit outlook and warned that rising prices of food and gasoline were prompting consumers to cut back on buying higher priced goods like electronics and clothes.

Some information for this report came from The Associated Press and Reuters.

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What’s Next for China’s Economy?

Two decades ago, China’s factory-driven economy awed the world as it expanded at more than 10% per year. But the country has missed double-digit growth over the past decade. The GDP shrank from April to June this year compared with the previous three months, though it topped the same quarter of 2021, but just barely.

Economists tell a consistent story about how the drop happened: Lockdowns to stop COVID-19 infections hurt factory work and export shipments. They say those setbacks added to financial hardships among China’s top property firms and the shocks of a 2021 crackdown on major Chinese tech icons. 

China’s $18 trillion economy, the world’s second largest after the United States, shrunk 2.6% from April to June compared to the first three months of the year. 

“China’s economy has seen signs of disruption since February due to the impact of COVID-19 outbreaks in a number of Chinese cities,” said Rajiv Biswas, executive director and Asia-Pacific chief economist at S&P Global Market Intelligence. He called industrial production, retail sales and port operations particular trouble spots. 

“The resulting disruption to retail sales and industrial production has been quite severe during April and May. And in Shanghai, port operations and logistics were also quite heavily disrupted during April,” Biswas said. 

Shanghai is China’s chief port city. The central government ordered lockdowns there in April. 

China’s economy grew close to 10% per year from 2003 to 2010, World Bank data show. Annual growth gradually slowed through 2019 before dipping to 2.2% in the first pandemic year, 2020, and rebounding to 8.1% last year.

Pressure on jobs, spending 

The lockdown-weary country recorded more than 6% unemployment in April, compared with nearly 5% (4.8%) at the end of 2021. Younger workers  and smaller firms have been hit especially hard, analysts say.  

Individuals contacted by VOA in Beijing, Shanghai and the inland city of Changsha this week said they knew about the employment crunch but felt their own jobs were stable.

“At least I don’t know of any friends around me who are jobless, and I’ve not heard that many complaints,” said a fashion importer who spoke on condition of anonymity.

Chinese consumers are now spending less than normal because they cannot go outside during mandatory closures, or they fear cuts in income from eventual job losses, said Alicia Garcia-Herrero, chief Asia-Pacific economist at French investment bank Natixis, who is based in Hong Kong. 

Retail sales grew at a low of 3% in June, even as lockdowns eased, Garcia said, pointing to “very negative sentiment as well as very slow growth in disposable income.”

“It is very clear that the household sentiment remains very negative, perhaps because of the uncertainty of future lockdowns as mass testing remains pervasive,” she said. 

Setbacks in property, tech, global confidence 

Last year, the economy was already faltering due to problems in real estate and tech. 

A number of big name Chinese property developers began to default on billions of dollars’ worth of loans last year, according to consultant firm Dezan Shira & Associates, who said homeowners who bought units through a “pre-pay model” are now refusing to pay mortgages on unfinished homes.

In tech, Chinese regulators began in cracking down on the country’s most powerful firms in late 2020, including e-commerce giant Alibaba Group and social media juggernaut Tencent. Regulators have cited concerns about monopolistic activity and data security.  

China’s economic malaise is worrying world markets because the “slope” of recovery is less steep than it was when COVID-19 hit in 2020, said Zerlina Zeng, a senior analyst at the CreditSights research firm in Singapore. Missed mortgage payments threaten the value assets, including property, she added.

Disruptions to export shipping and manufacturing in China have hobbled supply chains in much of the world, in turn adding to inflation and fears of recession.

Is the worst over? 

Officials in Beijing are nudging the economy forward again by spending on infrastructure. The GDP is already showing signs of recovery, Zeng said. Demand for cement and cars, including electric ones, is already up, she said. Officials are also relaxing last year’s tough stance on the tech industry, Zeng added.  

“Overall, we are seeing a better macro picture” this quarter, she said. “We think that for sure, [the economy] is going to recover but that the slope of the recovery is not going to be as good as what the market had expected back in the first quarter of this year.” 

Any future lockdowns will probably target neighborhoods rather than all of Shenzhen or Shanghai as the government did earlier this year, Zeng said. But she cautioned that China’s goal of 5.5% economic growth this year is “very ambitious.”

The government-run China Daily posted an investment bank editorial last week calling for 5.3% economic growth year on year from July through September, and 5.9% in the final months of 2022.

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IMF Paints Gloomy World Economic Outlook

World economic growth is slowing and the prospects for a quick recovery are gloomy, the International Monetary Fund said Tuesday.

The IMF said it expects growth to slow from last year’s 6.1% advance across the globe to 3.2% this year, four-tenths of a percentage point lower than it forecast in April.

“A tentative recovery in 2021 has been followed by increasingly gloomy developments in 2022 as risks began to materialize,” the IMF said. “Global output contracted in the second quarter of this year, owing to downturns in China and Russia, while U.S. consumer spending undershot expectations.”

The Washington-based international finance agency said that “several shocks have hit a world economy already weakened by the pandemic: higher-than-expected inflation worldwide – especially in the United States and major European economies – triggering tighter financial conditions; a worse-than-anticipated slowdown in China, reflecting COVID-19 outbreaks and lockdowns; and further negative spillovers from [Russia’s] war in Ukraine.”

The IMF said the price of consumer goods, especially for food and energy, is increasing throughout the world. The cost is expected to rise by 6.6% in advanced economies this year and by 9.5% in emerging market and developing economies, with both figures up nearly a percentage point from the IMF’s earlier projection.

“The risks to the outlook are overwhelmingly tilted to the downside,” the IMF said.

It said the war in Ukraine “could lead to a sudden stop” of Russia’s export of natural gas to European countries and that “inflation could be harder to bring down than anticipated” if employers cannot find enough workers to meet their labor demands or inflation increases at a faster pace than expected.

The IMF said that a “plausible alternative scenario” to its already diminished forecast would be a world economy “in which risks materialize, inflation rises further, and global growth declines” to about 2.6% and 2% percent in 2022 and 2023, respectively, figures that would put growth in the bottom 10% of outcomes since 1970.

“With increasing prices continuing to squeeze living standards worldwide, taming inflation should be the first priority for policymakers,” the IMF said.

The IMF forecast came as policy makers at the U.S. central bank, the Federal Reserve, began two days of meetings in Washington with the expectation they will announce another three-quarters of a percentage point increase in the Fed’s benchmark percentage rate on Wednesday, an effort to curb rampant inflation in the U.S., the world’s biggest economy.

With June’s 9.1% year-over-year surge in consumer prices in the U.S. – the fastest pace in four decades – the Fed has already boosted its prime lending rate this year from near zero percent to 1.6% and expects to end 2022 at 3.4%.

Increases in the Fed’s interest rate reverberate through the U.S. economy, with higher borrowing costs for car loans and consumer goods. By making it costlier to borrow money, the Fed’s expectation is that consumers and businesses will cut their spending and thus help curb inflation.

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Zimbabwe Introduces Gold Coins in Hopes of Reducing Demand for US Dollars

Zimbabwe’s central bank has introduced gold coins that it hopes will ease citizens’ demands for foreign currency. But economists and ordinary Zimbabweans are skeptical.

At the official launch of the gold coins in Harare on Monday, John Mangudya, head of the Reserve Bank of Zimbabwe, said the coins are designed to reduce demand for U.S. dollars in the country.

Zimbabweans are largely shunning the weak local dollar in favor of U.S. greenbacks, which Zimbabweans see as more acceptable abroad and better at holding their value long term.

Mangudya said he hoped that Zimbabweans will now opt for the gold coins, which cost about $1,800 each.

“We are now providing that store of value to ensure that people do not run to the parallel market in search for foreign currency to store value,” he said. “And there is no other better product that can be used to store value other than gold.”

Mangudya said the coin is a sign of respect for the people of Zimbabwe.

“We know what you have been going through in terms of the fear factor of losing value and therefore we are providing this gold coin,” he said. It’s a genuine gold coin to ensure that it is saved and invested there.”

Mangudya said 2,000 coins will be manufactured, with future production depending on the public’s appetite.

Prosper Chitambara, a senior researcher and economist at the Labor and Economic Development Research Institute of Zimbabwe, said despite the bank’s hopes he doubts the coins will drastically reduce demand for American dollars.

“Even the demand for U.S. dollar as a store of value, it will also rise because there are still a lot of uncertainties relating to the convertibility of these gold coins — are [they] internationally tradeable, especially given the trust and confidence issues?” Chitambara said.

Chitambra also expressed caution about the coin.

“Most people may not have money to buy this since most citizens are literally living from hand to mouth,” Chitambara said.

One of those Zimbabweans struggling to get by is Christine Kayumba, a high school teacher in Harare.

“The issue of gold coins to us teachers in Zimbabwe, is something we can dream of,” Kayumba said. “It means a teacher who is getting a salary of $190 to $200 would need nine to 10 months to buy one gold coin.”

For Kayumba, that $200 of salary pays for transport, food, rent and money to send children to school. It’s money to live, she said, not to buy a gold coin.

“So, I believe the gold coins were meant for the rich people, not the ordinary teacher or any civil servant in Zimbabwe,” she said.

Mangudya told reporters Monday that gold coins of lesser value would be minted in future to cater for people who have fewer resources.

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Germany on Cusp of Recession, says Ifo, as Business Sentiment Sinks 

German business morale fell more than expected in July, the Ifo business sentiment survey showed on Monday, as the institute that compiles it said high energy prices and looming gas shortages had left Europe’s largest economy on the cusp of recession.

The Ifo institute’s closely watched business climate index dropped to 88.6, its lowest in more than two years and below the 90.2 forecast in a Reuters poll of analysts. June’s reading was marginally revised down to 92.2.

“Recession is knocking on the door. That can no longer be ruled out,” said Ifo surveys head Klaus Wohlrabe.

Germany faces the threat of gas rationing unprecedented in generations this winter following a significant drop in supplies from Russia, whose president, Vladimir Putin, the West accuses of weaponizing energy in response to sanctions levied against him over the war in Ukraine.

Russia says it is conducting a “special military operation” there to fight nationalists.

Russia this month shut down the Nord Stream 1 pipeline that supplies Germany with gas via the bed of the Baltic Sea for 10 days of maintenance that some feared would be extended.

Pumping resumed on Thursday, but at only 40% of capacity.

Wohlrabe told Reuters in an interview that if German gas deliveries continued at that level “there will be no recession.”

However, Germany’s gas network regulator said on Friday that, if gas through the pipeline continued to be pumped at only 40%, the country would need to take “additional measures” to reach the 90% of storage capacity set as a target to avert winter rationing.

The government has said it would prioritize residents over the corporate sector in the event of rationing, and Monday’s Ifo index, which surveys about 9,000 firms, showed expectations for business to significantly worsen in the coming months.

“The Ifo business climate index, like the purchasing managers’ index, now clearly points to a downturn in the German economy,” said Commerzbank economic analyst Jorge Kraemer.

“How bad it ends up unfortunately lies mainly in Putin hands.”

S&P Global’s flash Purchasing Managers’ Index (PM) for German services and its index for manufacturing both fell to 49.2 in July, data showed on Friday, below analyst forecasts for them to hold above the 50 mark that separates growth from contraction.

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US Treasury Chief Downplays Recession as Wave of Economic Data Looms

Treasury Secretary Janet Yellen on Sunday said the U.S. economy is slowing but pointed to healthy hiring as proof that it is not yet in recession.

Yellen spoke on NBC’s “Meet the Press” just before a slew of economic reports will be released this week that will shed light on an economy currently besieged by rampant inflation and threatened by higher interest rates. The data will cover sales of new homes, consumer confidence, incomes, spending, inflation, and overall output.

The highest-profile report will likely be Thursday, when the Commerce Department will release its first estimate of the economy’s output in the April-June quarter. Some economists forecast it may show a contraction for the second quarter in a row. The economy shrank 1.6% in the January-March quarter. Two straight negative readings is considered an informal definition of a recession, though in this case economists think that’s misleading.

Instead, the National Bureau of Economic Research — a nonprofit group of economists — defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

Yellen argued that much of the economy remains healthy: Consumer spending is growing, Americans’ finances, on average, are solid, and the economy has added more than 400,000 jobs a month this year, a robust figure. The unemployment rate is 3.6%, near a half-century low.

“We’ve got a very strong labor market,” Yellen said. “This is not an economy that’s in recession.”

Still, Yellen acknowledged the economy is “in a period of transition in which growth is slowing,” from a historically rapid pace in 2021.

She said that slowdown is “necessary and appropriate,” because “we need to be growing at a steady and sustainable pace.”

Slower growth could help bring down inflation, which at 9.1% is the highest in two generations.

Still, many economists think a recession is on the horizon, with inflation eating away at Americans’ ability to spend and the Federal Reserve rapidly pushing up borrowing costs. Last week, Bank of America’s economists became the latest to forecast a “mild recession” later this year.

And Larry Summers, the treasury secretary under President Bill Clinton, said on CNN’s “GPS” Sunday that “there’s a very high likelihood of recession,” as the Fed lifts interest rates to combat inflation. Those higher borrowing costs are intended to reduce consumer spending on homes and cars and slow business borrowing, which can lead to a downturn.

On Wednesday, the Federal Reserve is likely to announce its second 0.75% point increase in its short-term rate in a row, a hefty increase that it hasn’t otherwise implemented since 1994. That will put the Fed’s benchmark rate in a range of 2.25% to 2.5%, the highest level since 2018. Fed policymakers are expected to keep hiking until its rate reaches about 3.5%, which would be the highest since 2008.

The Fed’s hikes have torpedoed the housing market, as mortgage rates have doubled in the past year to 5.5%. Sales of existing homes have fallen for five straight months. On Tuesday, the government is expected to report that sales of new homes dropped in June.

Fewer home sales also means less spending on items that typically come with purchasing a new house, such as furniture, appliances, curtains, and kitchenware.

Many other countries are also grappling with higher inflation, and slower growth overseas could weaken the U.S. economy. Europe is facing the threat of recession, with soaring inflation and a central bank that just last week raised interest rates for the first time in 11 years.

European Central Bank President Christine Lagarde also sought to minimize recession concerns in a news conference last Thursday.

“Under the baseline scenario, there is no recession, neither this year nor next year,” Lagarde said. “Is the horizon clouded? Of course it is.”

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Arrests as Madagascar Opposition Protest Living Costs

Police in Madagascar detained two leading members of the main opposition party on Saturday during a protest in the capital against rising living costs and economic hardship.

Several hundred anti-government demonstrators gathered in the center of Antananarivo in the morning, watched by a heavy military and police presence.

Police said they arrested Rina Randriamasinoro, the secretary general of the opposition Tiako I Madagasikara (TIM) party, and its national coordinator Jean-Claude Rakotonirina following tensions between demonstrators and security forces. The pair were later released.

“They were arrested and placed in police custody because they made comments inciting hatred and public unrest,” Antananarivo’s prefect Angelo Ravelonarivo told AFP.

Inflation has soared to the highest level in decades in many countries, fueled by the war in Ukraine and the easing of COVID-19 restrictions.

Organizers had wanted to hold the rally inside a warehouse belonging to opposition leader Marc Ravalomanana, but demonstrators arrived to find security forces blocking access to the venue.

Protesters then staged a sit-in outside the building.

Footage shared on social media showed police pulling Randriamasinoro and Rakotonirina from the crowd before taking them away in a police vehicle.

“The rally was authorized yesterday by the prefect and then this morning we discovered the police outside the gate,” said opposition lawmaker Fetra Ralambozafimbololona.

The arrests sparked further remonstrations, with demonstrators vowing not to leave the area until the two men were released — before eventually dispersing in the afternoon.

Randriamasinoro and Rakotonirina were eventually let go early in the evening, a police spokesperson said, adding authorities were yet to decide whether to press charges against them.

Protests are rare in the country with the opposition and rights groups accusing the government of President Andry Rajoelina of stifling dissent and rarely allowing demonstrations.

“We can’t say anything anymore,” said Samuel Ravelarison, a 63-year-old accountant attending the rally. “We came to demonstrate against the high cost of living.”

Ravelonarivo, the prefect, said that while the demonstration had not been banned, he had suggested it be held at a different location away from the city center.

One of the poorest nations in the world, Madagascar is still reeling from the economic effects of the coronavirus pandemic and a series of extreme weather events.

Tropical storms and cyclones have battered the country this year, killing more than 200 people, adding to the damage of a severe drought that has ravaged the island’s south leading to malnutrition and instances of famine.

Rajoelina, 48, first came to power in 2009, ousting Ravalomanana with the backing of the military.

He returned to the presidency in 2019, after beating his predecessor in an election beset by allegations of fraud.

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‘Day by Day’: Trade Bans, Inflation Send Food Prices Soaring

As inflation surges around the world, politicians are scrambling for ways to keep food affordable as people increasingly protest the soaring cost of living. One knee-jerk response has been food export bans aimed at protecting domestic prices and supplies as a growing number of governments in developing nations try to show a nervous public that their needs will be met.

For business owners, the rising cost of cooking ingredients — from oil to chicken — has prompted them to raise prices, with people paying 10% to 20% more at Soki Wu’s food stall in Singapore. For consumers, it has meant paying more for the same or lesser-quality food or curbing certain habits altogether.

In Lebanon, where endemic corruption and political stalemate has crippled the economy, the U.N. World Food Program is increasingly providing people with cash assistance to buy food, particularly after a devastating 2020 port blast that destroyed massive grain silos. Constant power cuts and high fuel prices for generators limit what people can buy because they can’t rely on freezers and refrigerators to store perishables.

Tracy Saliba, a single mother of two and business owner in Beirut, says she used to spend around a quarter of her earnings on food. These days, half her income goes to feeding her family as the currency loses strength amid soaring prices.

“I’m not buying (groceries) like I used to,” Saliba said. “I’m just getting the necessary items and food, like day by day.”

Food prices have risen by nearly 14% this year in emerging markets and by over 7% in advanced economies, according to Capital Economics. In countries where people spend at least a third or more of their incomes on food, any sharp increase in prices can lead to crisis.

Capital Economics forecasts that households in developed markets will spend an extra $7 billion a month on food and beverages this year and much of next year due to inflation.

The pain is being felt unevenly, with 2.3 billion people going severely or moderately hungry last year, according to a global report by the World Food Program and four other U.N. agencies.

Food prices accounted for about 60% of last year’s increase in inflation in the Middle East and North Africa, with the exception of oil-producing Gulf countries. The situation is particularly dire for Sudan, where inflation is expected to hit 245% this year, and Iran, where prices spiked as much as 300% for chicken, eggs and milk in May, sparking panic and scattered protests.

In Somalia, where 2.7 million people cannot meet their daily food requirements and where children are dying of malnutrition, sugar is a source of energy. In May, a kilogram of sugar cost about the equivalent of 72 cents in Mogadishu, the capital. A month later, it had shot up to $1.28 a kilogram.

“In my home, I serve tea (with sugar) three times a day, but from now on, I have to reduce it drastically to only making it when guests arrive,” said Asli Abdulkadir, a Somali housewife and mother of four.

People there are bracing for even higher costs after India announced it would cap sugar exports this year. Even if that doesn’t reduce India’s sugar exports compared with previous years, news of the restriction was enough to cause speculation among traders like Ahmed Farah in Mogadishu.

“The cost of sugar is expected to surge since Somalia counts heavily on the white sugar exported from India and a few brown sugars from Brazil,” he said.

Food export restrictions aimed at protecting domestic supplies and capping inflation is one reason for the rising cost of food.

Food prices had been steadily climbing worldwide because of drought, supply chain issues, and high energy and fertilizer costs. The U.N. Food and Agriculture Organization says food commodity prices were up 23% last year.

Russia’s war in Ukraine further sent the price of wheat and cooking oils up, fueling a global food crisis. There was a breakthrough this week to create safe corridors for Black Sea shipments, but Ukrainian ports have been blocked from exporting these key goods for months and it will take time to get them moving again to vulnerable countries worldwide.

There’s concern that the impact of all these factors will lead more countries to resort to food export bans, which are felt globally. When Indonesia blocked the export of palm oil for a month in April, palm oil prices spiked by at least 200%.

Analysts say food export bans are shortsighted because they have a domino effect of driving up prices.

“I would say that roughly 80% of the bans we see are ill-advised — a kind-of, sort-of gut reaction by certain politicians,” said David Laborde, who is credited with creating a food trade policy tracker at the International Food Policy Research Institute.

“In the world where you will be the only one to do it, that can make sense,” he said. “But in a world where other countries can also do it, actually that’s far from being a good idea.”

Laborde said bans are “a very selfish policy … because you try to get better by making things worse for others.”

The list of food export restrictions Laborde has been tracking since the COVID-19 pandemic is long and changes constantly. Examples of their impact include Kazakhstan’s restrictions on grains and oil on prices in Uzbekistan, Tajikistan, Turkmenistan and Afghanistan; Cameroon’s rice export restriction on Chad; and Tunisia’s fruit and vegetable restrictions on Libya.

In Singapore, 29-year-old Wu is hopeful he can keep the family business running as Singapore’s government signed off on Indonesia as a new chicken supplier.

“Things will get better,” he said. “(This) will only make us more resilient.” 

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E-Commerce in Africa Projected to Grow 56% by 2025

Online sales boomed during the COVID-19 pandemic, including those in some parts of Africa, where industry analysts say online trade is expected to grow by over half in the next three years. The continent’s online market potential faces numerous challenges, though. For VOA, Linda Givetash reports from Johannesburg.
Videographer: Zaheer Cassim

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Brussels Calls on EU Member States to Slash Natural Gas Use

With tensions growing over the war in Ukraine and Russia’s energy cuts, the European Union’s executive arm is calling on member nations to cut natural gas consumption by 15% between August and next March to avoid what it calls energy ‘blackmail” — and its potentially catastrophic economic fallout.

The EU’s executive branch wants the 15% cuts to be across the board and, for now, voluntary, but seeks the power to make the reductions mandatory if Moscow deeply or completely cuts its gas exports to the bloc.   

“We have to be proactive. We have to prepare for a potential full disruption of Russian gas,” said European Commission President Ursula von der Leyen. “And this is a likely scenario. What we’ve seen in the past, as we know, Russia is calculatingly trying to put pressure on us by reducing the supply of gas.”  

Russia’s Gazprom has already partly or fully cut supplies to nearly a dozen of the EU’s 27 members, as Brussels tightens sanctions against Moscow over the war in Ukraine. Already, the International Monetary Fund says, even this partial cutoff is hurting European economies.  

More recently, Gazprom shut its key Nord Stream 1 pipeline to Germany and beyond, ostensibly for short-term maintenance. It’s unclear if the pipeline will resume operation. Brussels wants member states to prepare for the worst.  

“Russia is blackmailing us. Russia is using energy as a weapon,” von der Leyen said.  

Last year, Russia provided 40% of the EU’s total gas. Since Moscow invaded Ukraine in late February, the bloc has been seeking to diversify supply sources. But experts say that won’t be enough to meet its energy needs. Countries like Finland and the Netherlands are already cutting consumption.  

While proposed cuts cover European industries, Brussels wants ordinary citizens and others to save energy — especially as climate change fears hit home this week, with record-breaking heatwaves in some parts of Europe.  

Commission Vice President Frans Timmermans said a new creative approach is needed.  

“Do we need to have the lights on in empty office buildings or shop fronts all nights? he asked. “Do we have to have air conditioning set at 20 degrees (68 degrees Fahrenheit)? It could be higher, couldn’t it?”  

Still, some of Brussels’ proposals, like diversifying gas sources and extending coal plants, will inject more emissions into the air in the short term. EU member states still need to approve the commission’s proposals. Energy ministers will discuss them next week.

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Yellen Calls Out China Trade Practices in South Korea Visit

Treasury Secretary Janet Yellen said the U.S. and South Korea should deepen their trade ties to avoid working with countries that use their market positions to unfair advantage — calling out China by name.

“We cannot allow countries like China to use their market position in key raw materials, technologies, or products to disrupt our economy or exercise unwanted geopolitical leverage,” Yellen said in remarks prepared for delivery Monday, according to excerpts provided by the Treasury Department.

She is set to make the speech at an LG Corp. factory in South Korea. LG in April announced plans to build a $1.4 billion battery plant in Queen Creek, Arizona. 

Yellen represented the U.S. at the Group of 20 finance minister meetings on Indonesia’s resort island of Bali and made stops in Tokyo, Japan and Seoul, South Korea. She avoided visiting China but held a call with China’s vice premier at the start of the month.

Yellen has been a critic of China’s economic relationship with Russia — urging the Asian superpower to use its “special relationship with Russia” to persuade Russia to end its invasion of Ukraine.

China “has directed significant resources to seek a dominant position in the manufacturing of certain advanced technologies, including semiconductors, while employing a range of unfair trade practices to achieve this position,” she said in her prepared speech.

Citing “the unfair Chinese practices that damage our national security interests,” Yellen calls on countries to engage in “friend-shoring” as a means to lower economic risks for participating economies.

Friend-shoring, which Yellen has brought up in several speeches, refers to countries with shared values agreeing to trade practices that encourage manufacturing and reducing risks to supply chains.

The global economy has been ravaged by the impacts of the war in Ukraine and shutdowns caused by COVID-19. Skyrocketing energy costs and high inflation have touched every part of the globe.

The Indo-Pacific region is seeing this play out in Sri Lanka, which is struggling through the island nation’s worst economic crisis.

Yellen is set to make her statements ahead of a Tuesday meeting with South Korean President Yoon Suk Yeol to end her first trip as treasury secretary to the Indo-Pacific region. 

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China Urges Banks to Extend Loans for Real Estate Projects Amid Mortgage Boycott

Chinese regulators Sunday urged banks to extend loans to qualified real estate projects and meet developers financing needs where reasonable, in their latest effort to ease concerns triggered by a widening mortgage-payment boycott on unfinished houses.

The remarks by the China Banking and Insurance Regulatory Commission (CBIRC) came after a growing number of home buyers across China threatened to stop making their mortgage payments for stalled property projects, aggravating a real estate crisis that has already hit the economy. 

Investors have continued to dump Chinese banking stocks as well as developers’ shares and bonds, even after the CBIRC vowed Thursday to strengthen its coordination with other regulators to “guarantee the delivery of homes.” 

In an interview with the official China Banking and Insurance News on Sunday, the CBIRC reiterated that it will support local governments to promote home delivery, and expressed confidence that with concerted efforts, “all the difficulties and problems will be properly solved.”

More specifically, the regulator urged banks to “shoulder social responsibility” and actively participate in the study of plans to fill the funding gap, so that the construction of stalled real estate projects can be resumed swiftly, and homes can be delivered to buyers early.

It also urged banks to strengthen communication with mortgage clients and support acquisitions of real estate projects to help stabilize the property market.

In addition, the watchdog said that financial risks in the northeastern province of Liaoning has been growing recently but were under control, and the government will take measures to prevent risks at China’s small lenders.

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Thailand Sets 2028 Target to Finish High-Speed Rail Link with China

Thailand’s recent pledge to finish a long-delayed high-speed rail line linking it to China through Laos within six years is reigniting doubts about the country’s commitment and whether the $12 billion megaproject will pay off.

Transport and Foreign Affairs ministries officials told reporters July 6 Thailand will complete the 609-kilometer line from the capital, Bangkok, to the Lao border at Nong Khai, now only 5% built, by 2028. Nong Khai is just across the Mekong River from the Lao capital of Vientiane, where a high-speed train to the Lao-China border started service in December.

With trains running at a maximum speed of 250 km/h, the new line will collapse the time the Bangkok-Nong Khai journey takes now on existing standard-gauge tracks.

The 2028 announcement came a day after Chinese Foreign Minister Wang Yi met with Thai Prime Minister Prayut Chan-ocha and Foreign Affairs Minister Don Pramudwinai in Bangkok. A Thai Foreign Affairs Ministry statement on Wang’s visit says the meeting included talks on a “Thailand-Laos-China Connectivity Development Corridor.”

The project is part of Beijing’s long-term plans to link China’s Yunnan province to the bustling ports of Singapore via high-speed trains cutting through Laos, Thailand and Malaysia in a key piece of its grand Belt and Road initiative.

Cautious commitment

When Thailand started planning its portion of the line with China over a decade ago, the goal was to have it done by about the same time as Laos finished its own 414-kilometer stretch, Ruth Banomyong, a professor of international trade, transport and logistics at Thailand’s Thammasat University, told VOA. But with that target long since abandoned, he said top government transport officials were still noncommittal on a new goal just last month at a seminar he attended, making the announcement on July 6 “a bit confusing.”

Ruth said the new target was feasible but may be more of a political statement than a “technical” one, made with an eye on national elections due next year and Prayut’s fractious coalition government looking increasingly unsteady.

“The prime minister is probably at his lowest in terms of various [opinion] polls that have been published, and he wants to stay in power, but he needs to have something to show for himself,” said Ruth. “So, they need to re-put this project in the public eye, saying that, oh yes, it is going to be done.”

He said growing frustration in Beijing with the pace of Thailand’s progress may have played a part in the announcement, too.

“The fact that it’s announced after a meeting with the Chinese foreign minister, Wang Yi, it does make it look like they’re feeling some pressure to be at least looking like they’re moving forward with this project,” said Greg Raymond, a lecturer at Australian National University studying China’s growing connections with mainland Southeast Asia.

“But when you look at the pattern of [Thailand’s] decision-making, the pattern of action … the degree of commitment has to be questioned,” he added.

Analysts say the line, once complete, will help plug some of Southeast Asia’s largest and most dynamic economies into China’s landlocked south, giving the underdeveloped region a much-needed boost.

As with much of the Belt and Road Initiative, Raymond said, it also builds on Beijing’s broader goal of forging a regional economy centered on China, and of wielding that position to bend the foreign policies of other countries to its will. He pointed to Thailand’s scrapping of plans years ago to host a NASA climate change monitoring program, which he said was probably because China would not like having something like that so close. At the same time, he added, linking southern China to some of mainland Southeast Asia’s main ports would ease the pressure on China’s vital sea trade routes in case of conflict.

“If there’s a conflict between China and the United States, I think one of the things that China’s vulnerable to is a blockade by the [U.S. Navy’s] 7th Fleet, particularly at the Malacca Strait, so I think there is that sort of strategic imperative,” Raymond said.

Cost and benefit

For Thailand, the new line could mean more exports to, and investment from, China.

Ruth, though, said it will take decades, not years, for the $12 billion project to pay for itself, and only if the government also invests in the additional freight and passenger services needed to bring out the line’s full potential. Done right, he added, the line could also spur new growth and development along its route through Thailand’s rural northeast.

But Ruth said the government has yet to share its forecasts for key factors such as passenger numbers or freight traffic, making a hard-nosed assessment of the project impossible.

“What we tend to see is that a lot of these forecasts are very, very optimistic, and that’s why you sometimes end up with having white elephants … nice infrastructure that is not utilized fully, so that’s really the risk,” he warned.

Bryan Tse, Southeast Asia analyst for the Economist Intelligence Unit, said the high-speed train line’s focus, for now, appears to be on passengers, not freight, dimming the odds that Thailand can make the $12 billion back in 10 or even 20 years. If the main goal were boosting freight traffic, he said China would probably have focused on upgrading the network of regular train tracks crisscrossing Southeast Asia already, which would be cheaper.

But the project need not necessarily pay for itself directly to pay off for Thailand in other ways, Tse added.

“If getting this railway done means that you get the good will of the Chinese government … then you may get a lot of things in return politically and economically, in terms of investment, for instance,” he said.

Still, the analysts say Thailand is likely to remain hesitant about the project; $12 billion is a lot, and the added strain the pandemic has put on the country’s economy will only make it harder to move forward on the line to Laos, not to mention any high-speed line that might eventually be built south of Bangkok to Malaysia.

Raymond said Thailand is also wary of any moves, the high-speed rail line included, that might draw China too close for comfort.

“They don’t want to be drawn in, really, to a Beijing-centered economy if they think it’s going to reduce their freedom of maneuver,” he said. “They’re always seeking to balance their relationships; they don’t want to become too dependent on any of them. This is the classic hedging behavior, but it’s very strong with Thailand.”

Now that Laos is done with its stretch of the line, the analysts agreed that China is likely to focus its attention on seeing that Thailand picks up the pace.

Whatever their reservations, Raymond said, their Thai partners “might eventually feel like they have to do it.”


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