A perilous time for the British economy
Prime Minister Boris Johnson’s political position continued to be on the rocks this morning as several lower-ranking ministers’ resignations followed two shattering defections last night. The moves raise questions about how long he can cling to power and what a change in leadership would look like for the British economy.
The resignations were connected to a series of scandals that cast doubt on Johnson’s honesty. The two top ministers who stepped down from the cabinet yesterday — the chancellor of the Exchequer, Rishi Sunak, and the health secretary, Sajid Javid — said they could no longer serve in Johnson’s government, with Sunak saying that the public was right to expect that government “be conducted properly, competently and seriously.”
The development puts Johnson in an even more perilous position than he was in a month ago, when he survived a no-confidence vote in which more than 40 percent of Conservative lawmakers did not back him. Amid the string of resignations, members of Parliament in Johnson’s Conservative Party reiterated calls for him to step aside, but on a day of rapidly unfolding developments, Mr. Johnson vowed to fight on.
The prime minister quickly reshuffled his cabinet, appointing Nadhim Zahawi, the education secretary, as the new chancellor. Zahawi told Times Radio this morning that he would reconsider the government’s plans to raise corporate tax in the spring. “My task is to rebuild the economy and return to growth,” he said in a separate interview on BBC radio. And 2023, he said, will be a tough year for the economy.
Mujtaba Rahman, the managing director for Europe at the consultancy Eurasia Group, told DealBook that Johnson would be even more beholden to different currents in Parliament, particularly the right of his party, in order to stave off another possible vote of no confidence.
The latest scandal in Downing Street involved accusations that Chris Pincher, a Conservative lawmaker who was a minister in Johnson’s government, had groped two men. For days, the government said that the prime minister did not know about previous accusations when he appointed Pincher, but on Monday, Downing Street acknowledged that Johnson had known about one accusation.
“This is not a stable government in the business of making policy as a normal government would,” Rahman said. “This is a government driven by crisis, driven by the desire for Johnson to survive and remain in place. That’s driving the policy agenda.”
Rapidly rising prices for food, energy and other consumer goods have caused a cost-of-living crisis for many people in Britain. Moreover, labor shortages and supply chain issues driven in part by Brexit have pushed up prices for services and have made it difficult for businesses to operate. Inflation is at its highest level in four decades, and it is not expected to peak for several months. Taxes and the costs of loans are increasing, with interest rates at their highest levels since 2009.
Economic factors outweighed the upheaval in British politics, Jordan Rochester, a strategist at the bank Nomura, wrote in a report last night. This morning, as London’s financial markets reopened, Britain’s benchmark stock market index rose by more than 1 percent, alongside increases in other European markets, writes The Times’s Eshe Nelson. After a small gain yesterday, the British pound fell slightly against the U.S. dollar this morning, extending a 1.5 percent drop the day before and hitting a two-year low against the dollar, as investors sought the safety of U.S. currency amid recession fears.
The political instability comes as Britain gears up for a “summer of discontent.” Workers, demanding higher wages, are going on strike in numbers not seen in years, writes The Times’s Stephen Castle. Criminal defense lawyers are some of the latest to demand more pay, after a major strike by rail workers last month. Teachers, health and postal workers and staff members at British Airways have also threatened walkouts
HERE’S WHAT’S HAPPENING
A hack may have exposed police data on one billion Chinese residents. The episode highlights the fact that while Beijing has become an expert at collecting data on its citizens, it hasn’t been as good at protecting that data. The unidentified hacker, who goes by the name ChinaDan, is selling the data for 10 Bitcoin, or just $200,000.
SAS cancels many flights after filing for Chapter 11. The Scandinavian airline, which filed in the U.S., said it planned to use the court protection to cut more than $700 million in costs. The carrier’s woes are part of a summer of problems for Europe’s travel industry, including staffing shortages and walkouts.
The euro falls to a 20-year low against the U.S. dollar. The two currencies came within a few cents of hitting parity, as Europe’s economy, in part because of its ties to Russia, stumbled. The price of oil also dropped steeply yesterday, falling by over 9 percent, taking the price of West Texas Intermediate crude, the U.S. benchmark, below $100 for the first time since May.
The long-delayed Hudson River tunnel project inches forward. Yesterday, Gov. Kathy Hochul of New York and Gov. Philip Murphy of New Jersey agreed to split the cost of digging the new train tunnels. The plan, among the most important and ambitious infrastructure projects in the country, is still not guaranteed to move forward.
Walmart will reportedly charge some suppliers new fees in response to higher transportation costs. A memo seen by The Wall Street Journal said that the new fees were the result of “Walmart adapting to the significant transformation and increased cost seen in the transportation industry over the past few years.” Amazon has made a similar move.
Now too many chips?
When a global shortage of computer chips stalled manufacturing during the coronavirus pandemic, the Biden administration and U.S. lawmakers pushed for taxpayer funding for computer chips. That’s starting to look like a mistake, our colleague Shira Ovide writes in the On Tech newsletter.
In recent weeks, some computer chips seem to have become overabundant. People around the world are not buying electronics like laptops, smartphones and TVs as much as they were a year or two ago. Many are also worried about climbing prices and the economic outlook. Unused chips are piling up in South Korea, a major manufacturing hub, at the fastest rate in years. Intel, Nvidia and Micron, which all saw sales soar amid skyrocketing demand for their products, have more recently warned that they expect sales to slow in the coming months.
Elsewhere, chips are still in short supply. Stellantis and General Motors had to idle assembly plants recently because of the semiconductor shortage.
Meet the bullwhip effect. It explains how disruptions to supply and demand can become exponentially larger as they move through the supply chain. As our colleague Peter Coy recently explained in an Opinion piece, as orders pass back and forth from customers to distributors to factories, shortages can quickly turn into surpluses and then back again — and prices can whipsaw wildly.
Meanwhile, the U.S. is cracking down on the export of semiconductors and other sensitive technology to China from some countries in the West, based in part on the lessons it has learned from sanctions imposed on Russia. Bloomberg reports that the U.S. is trying to stop a Dutch company, ASML Holding NV, from selling China technology used to make computer chips for cars, phones and computers.
Ultimately, the attempts to build a homegrown chip industry seem misplaced. “Even if more computer chips were made in America,” Shira writes, “there’s no reason a chip made in Texas would go only in Ford F-150s and not trucks from European or Asian companies.” There may be an argument that the CHIPS Act — currently stalled in Congress — is meant to produce for the future, not just to match current demand. But as Shira told DealBook, “It’s worthwhile to build expertise in advanced computer chip making in the U.S., but the government may be trying to solve too many problems with taxpayer money.”
“The government gave this project as much push as you could hope for, and it still failed.”
— Fernando Alvarez, an economist at the University of Chicago, on El Salvador’s decision to make Bitcoin a national currency. Nearly a year later, the country is closer default.
How war tanked Russia’s coolest company
Just a few months ago, Yandex was a rare Russian business success story — the equivalent of Google, Uber, Spotify and Amazon all rolled into one. But then came the war, and with it a precipitous decline that is emblematic of the economic and cultural troubles spawned by the invasion, reports The Times’s Neil MacFarquhar.
Yandex’s market value has plunged by 80 percent in only a few months. That drop — to less than $7 billion, from $31 billion in late 2021 — comes as Western investors have fled and sanctions have affected the Russian economy. Nasdaq suspended trading in its shares. The company’s founder, Arkady Volozh, and his top deputy stepped away from the company after facing E.U. sanctions.
The company is navigating an extreme form of remote work. About a sixth of its work force in Russia, or 2,500 employees, have fled the country. Tensions are increasing between the employees who left and those who remained.
Russian censorship has taken a toll. Besides running what the company has claimed to be the country’s top engine, Yandex also ran one of Russia’s largest news aggregation sites, drawing around 50 million visitors a day before the war. Executives and users had come to accept the Kremlin’s curation of news sources, but with the invasion, Yandex quickly became the butt of jokes.
“Yandex was like an island of freedom in Russia, and I don’t know how it can continue,” said Elena Bunina, a math professor whose five-year tenure as Yandex’s C.E.O. ended in April, when she emigrated to Israel.
THE SPEED READ
Best of the rest
“Good Luck Making It to Your Vacation This Summer” (Bloomberg Opinion)
Some companies are offering midyear raises to retain employees and because of high inflation. (WSJ)
“China Offers Women Perks for Having Babies. Single Moms Don’t Qualify.” (NYT)
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