Reports of Russian’s Using Chemical Weapons
“There are some thing that are beyond the pale, and the use of chemical weapons will get a response and all options are on the table for what the response could be” – those words from Armed Forces minister James Heappey after reports that Russia may have used chemical agents in Mariupol. The death toll in the city was expected to be in the thousands, before reports of chemical weapons being used arose. Western governments will want to wait for firm confirmation that this has happened before making any moves, but most leaders are united in their view that this is a “red line” – though this was also a red line under the Obama administration in Syria and when Assad killed almost 1,500 people with Sarin gas he did nothing.Russian news agency Interfax confirmed that Gazprom is going to continue to deliver Russian gas to Europe in line with orders. Today 74.5m cubic metres will be delivered through pipelines that run through Ukraine. There’s an interesting New York Times podcast entitled “how Germany’s approach to Russia backfired” which is worth a listen. The long and short of it is that they were warned about dependency, but rebuffed the concerns because they were of the mind that Russia had as much to lose as they did. The range of GDP loss forecasts if gas does stop flowing to Russia are wide ranging, but it would be a huge global financial crisis sized blow to their economy. That said, this Guardian article talks about what they are doing to try and prepare for the that happening (through their choice or Russia’s).

The New York Times Podcast:

The Guardian has more:

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Cost of Rebuilding Ukraine
The Centre for Economic and Policy Research have estimated that the cost to rebuild Ukraine is going to land somewhere between €200-500bn. For a country where pre-conflict GDP was just €150bn, this represents a daunting prospect and something that is going to hamstring the country for decades to come. As we reported yesterday, Ukraine’s GDP is forecast to take a 45% hit because of the war and in doing so would mean an economy of just €85bn, with a pre-war international debt burden of about the same, meaning their starting point as a country is at least 100% debt to GDP, likely higher as they’ve been issuing war bonds and entering into bilateral loans to finance the conflict. Debt relief from the international community will almost certainly be forthcoming and there will no doubt be plenty of offers of ultra-cheap financing for the rebuild, with European interest rates so low and infrastructure being rebuilt. Europe are already talking about at least €100bn in development funding and its likely to follow similar lines to the post WWII Marshall Plan, in which monies are lent but the influence on how the country and its trading ties are rebuilt will also heavily factor into the loans.  The elephant in the room remains Russia’s obligations to make reparations: Yesterday Ukraine’s finance minister told Sky News that Russia should be made to pay and that Western governments should ensure this happens – with the > $400bn of frozen assets of the country – but unsurprisingly Russia hasn’t made any comment around this.

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UK Labour Market
Data released this morning indicates that UK unemployment fell to 3.8% in the three months between December and February, being widely in line with expectations. This means that an additional 10,000 people were in employment from the previous three months with the total number of employment rising to 32.49m. While the additional jobs are a positive sign for the heath of the UK labour market, with average year-on-year earnings growth standing at 5.4% including bonuses, and 4% excluding bonuses, there has been a real terms cut in wages of 0.8% and 2.2% respectively, given that inflation currently stands at 6.2%.

Moreover, since most economists consider around 3% unemployment to represent ‘full employment’, today’s figures suggest that the UK labour market is not far off this level. The paradox however is that the number of job vacancies in the UK reached 1.29m – its highest on record. Hence, as unemployment continues to decrease, while job vaccines increase stresses will continue to manifest themselves in the UK labour market and economy more generally. For example, many economists are warning that this will likely lead to higher wages being offered which in turn could exacerbate inflation. The ONS also noted a major disparity between wage growth in the public and private sector with the former seeing growth of 1.9% while the latter sees 6.2%, hence as the rising cost in living bites households across the UK, it is likely that there will be more pressure on the public sector to increase wages.

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​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​Inflation Set to Rise. UK and US
At 12:30 this afternoon, all eyes will be on US CPI data where the general market consensus is that the headline inflation print will rise from 7.9% to 8.4%. While this figure remains around four times higher than the Fed’s target rate of 2% – their appetite to raise rates are severely hindered by the desire not to dampen growth, as worries over a looming recession continue to grow.

Following the US’ inflation print, UK CPI figures will be released at 06:00 am tomorrow where the market predicts a print of 6.7%. This would similarly represent a considerable acceleration from last month’s print of 6.2%, although given that this will record inflation from March it will not take into consideration the 54% rise in the energy price cap which came into effect this month. What’s more is that the energy price cap is expected to rise by a further 40% in October and as such the OBR are now predicting that inflation will peak at close to 9% in Q4 2022.

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Have a great day.

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