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Month: March 2022

For a California Cafe, a New Lease Is Hope After Two Bad Years

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Last month, not quite two years after the COVID-19 pandemic sent the U.S. and world economies into their steepest downturn in decades, Chris and Amy Hillyard renewed the lease on their downtown Oakland coffee spot, Farley’s East.

The location had notched record sales in February 2020 and then, like all other “non-essential” local businesses, had to shut the following month as authorities moved to curb the spread of the new and deadly infection.

Two years on, most of the nearby office workers who used to pop in for lunch and lattes are still doing their jobs from home, and the cafe still doesn’t bring in enough money to cover monthly expenses, Chris Hillyard said. 

That’s despite their landlord agreeing to a slightly lower rent for the new five-year term, he said. But Hillyard is undeterred.

“Two bad years isn’t going to kill us off,” he said. “We’ll get through it… We are betting on that happening.”

On the face of it, it’s a good bet. COVID cases have dropped, schools have loosened rules, and more local businesses are bringing workers back to their offices. Last quarter, the vacancy rate for U.S. office space fell for the first time since mid-2019, figures from CBRE Econometric Advisors show.

There’s still a long way to go. CBRE economists don’t expect the vacancy rate to ease to its 30-year average of 15% until 2026.

A back-to-work barometer measuring keycard swipes and other building access data from security firm Kastle Systems registered just 40% of pre-pandemic levels across 10 major cities this week; the San Francisco metro area registered around 30%.

“This is about to jump considerably,” said Phil Ryan, director of U.S. Office Research at JLL, citing announcements from large tech and financial tenants to have employees back in the office at least half time beginning in late March. “Over the short-term, foot traffic is likely to rise.”

High inflation, scarce labor

Still, Hillyard’s optimism is challenged by inflation that’s already the highest in 40 years and could rise even more.

Consumer prices were up 7.9% in February year over year, and look set to post an even bigger gain this month as Russia’s invasion of Ukraine drives up the price of gas, wheat and other commodities.

The Hillyards are feeling the pinch. Each week brings a new notice from one supplier or another: a March 1 price hike from the bakery that supplies its pastries, a half-gallon of milk now $2.68 instead of $2.25, a 25% increase in the price of coffee beans.

To compensate, Farley’s raised its own prices last month for the first time since the start of the pandemic, about 10% for most items. And though customers seemed to take it in stride, it’s not something Hillyard says he will be able to soon repeat.

“Prices can’t keep going up or the whole system will go down,” Hillyard said.

Meanwhile, he said he can’t hire enough workers, despite offering higher pay. The Oakland-area workforce – the pool of those working or in the market for a job – has been recovering but was about 33,000 people short of its prepandemic level in January, according to the Bureau of Labor Statistics. That’s a deficit of about 2.3% from February 2020, 2 percentage points greater than the national average.

With only five employees on shifts that really need six, “it’s hard on the staff because they are asked to do more,” he said.

Nonetheless, the Hillyards are hopeful. One reason is the success of their second, smaller operation in San Francisco’s Potrero Hill neighborhood, where sales have rebounded to pre-pandemic levels thanks to plenty of foot traffic from work-from-homers and brisk sales of a new line of merchandise including T-shirts, totes and coffee mugs.

A second reason is the long-planned opening of two airport locations, one in San Francisco, where international travel is still sluggish, and a second one starting last month at Oakland airport, where Southwest Airline’s domestic business is burgeoning.

Yes, local gas prices jumped about a dollar on the gallon in the weeks after Russia’s invasion, and Hillyard says he’s probably in for fuel surcharges ahead as delivery trucks try to recoup losses.

But after two rough years, “I just can’t worry about something so specific,” he said.

“We’re just looking to move forward and sell more coffee.”

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New World Order? Pandemic and War Rattle Globalization

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Globalization, which has both fans and detractors alike, is being tested like never before after the one-two punch of COVID and war.

The pandemic had already raised questions about the world’s reliance on an economic model that has broken trade barriers but made countries heavily reliant on each other as production was delocalized over the decades.

Companies have been struggling to cope with major bottlenecks in the global supply chain.

Russia’s war in Ukraine has raised fears about further disruptions, with everything from energy supplies to auto parts to exports of wheat and raw materials under threat.

Larry Fink, the head of financial giant BlackRock, put it bluntly: “The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades.”

“We had already seen connectivity between nations, companies and even people strained by two years of the pandemic,” Fink wrote in a letter to shareholders Thursday.

But U.S. Treasury Secretary Janet Yellen disagrees.

“I really have to push back on that,” she told CNBC in an interview. 

“We’re deeply involved in the global economy. I expect that to remain, it is something that has brought benefits to the United States, and many countries around the world.”

‘An animal that evolves’

Shortages of surgical masks at the outset of the pandemic in 2020 became a symbol of the world’s dependence on Chinese factories for all sorts of goods.

The conflict between Russia and Ukraine has raised concerns about food shortages around the globe as the two agricultural powerhouses are among the major breadbaskets of the world.

It has also put a spotlight on Europe’s — and especially Germany’s — heavy dependence on gas supplies from Russia, now a state under crippling sanctions.

“A number of vulnerabilities” have emerged that show the limits of having supply chains spread out in different locations, the former director general of the World Trade Organization, Pascal Lamy, told AFP.

The global trade tensions have prompted the European Union, for instance, to seek “strategic autonomy” in critical sectors.

The production of semiconductors — microchips that are vital to industries ranging from video games to cars — is now a priority for Europe and the United States.

“The pandemic did not bring radical changes in terms of reshoring (bringing back business from overseas),” said Ferdi De Ville, professor at Ghent Institute for International & European Studies.

“But this time it might be different because (the conflict) will have an impact on how businesses think about their investment decisions, their supply chains,” he said.

“They have realized that what was maybe unthinkable before the past month has now become realistic, in terms of far-reaching sanctions,” said de Ville, author of an article on “The end of globalization as we know it.”

The goal now is to redirect strategic dependence towards allies, what he coined as “friend-shoring” instead of “off-shoring.”

A U.S.-EU agreement Friday to create a task force to wean Europe off its reliance on Russian fossil fuels is the most recent example of friend-shoring.

For Lamy, this shows “there is no de-globalization.”

Globalization, he said, is “an animal that evolves a lot.”

Decoupling from China

Globalization had already faced an existential crisis when former U.S. President Donald Trump launched a trade war with China in 2018, triggering a tit-for-tat exchange of punitive tariffs.

His successor, Joe Biden, invoked the need to “buy American” in his sweeping investment plan to “rebuild America.”

“We will buy American to make sure everything from the deck of an aircraft carrier to the steel on highway guardrails are made in America,” he said in his State of the Union speech.

One concept that emerged during the Trump years was “decoupling” — the idea of untangling the U.S. and Chinese economies.

The threat has not subsided, especially with China refusing to condemn Russia’s invasion of Ukraine.

The United States has warned the world’s second-biggest economy would face “consequences” if it provides material support to Russia in its war in Ukraine.

China already had other contentious issues with the West, such as Taiwan, the self-ruled democracy which Beijing has vowed to seize one day, by force if necessary.

“It is not in China’s interest for now to go into competition with the West,” said Xiaodong Bao, portfolio manager at the Edmond de Rothschild Asset Management firm.

But the war in Ukraine is a chance for China to reduce its reliance on the U.S. dollar. The Wall Street Journal reported that Beijing is in talks with Saudi Arabia to buy oil in yuan instead of dollars.

“China will continue to build foundations for the future,” Bao said. “The financial decoupling is accelerating.” 

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Biden Budget to Trim $1 Trillion from Deficits Over Next Decade 

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President Joe Biden intends to propose a spending plan for the 2023 budget year that would cut projected deficits by more than $1 trillion over the next decade, according to a fact sheet released Saturday by the White House budget office. 

In his proposal, expected Monday, the lower deficits reflect the economy’s resurgence as the United States emerges from the pandemic, as well as likely tax law changes that would raise more than enough revenue to offset additional investments planned by the Biden administration. It’s a sign that the government’s balance sheet will improve after a historic burst of spending to combat the coronavirus. 

The fading of the pandemic and the growth has enabled the deficit to fall from $3.1 trillion in fiscal 2020 to $2.8 trillion last year and a projected $1.4 trillion this year. That deficit spending paid off in the form of the economy expanding at a 5.7% pace last year, the strongest growth since 1984. But inflation at a 40-year high also accompanied those robust gains as high prices have weighed on Biden’s popularity. 

For the Biden administration, the proposal for the budget year that begins October 1 shows that the burst of spending helped to fuel growth and put government finances in a more stable place for years to come as a result. One White House official, insisting on anonymity because the budget has yet to be released, said the proposal shows that Democrats can deliver on what Republicans have often promised without much success: faster growth and falling deficits. 

Republicans focus on inflation

But Republican lawmakers contend that the Biden administration’s spending has led to greater economic pain in the form of higher prices. The inflation that came with reopening the U.S. economy as the closures from the pandemic began to end has been amplified by supply chain issues, low interest rates and, now, disruptions in the oil and natural gas markets because of Russia’s invasion of Ukraine. 

Senate Republican leader Mitch McConnell of Kentucky pinned the blame on Biden’s coronavirus relief as well as his push to move away from fossil fuels. 

“Washington Democrats’ response to these hardships has been as misguided as the war on American energy and runaway spending that helped create them,” McConnell said last week. “The Biden administration seems to be willing to try anything but walking back their own disastrous economic policies.” 

Biden inherited from the Trump administration a budget deficit that was equal in size to 14.9% of the entire U.S. economy. But the deficit starting in the upcoming budget year will be below 5% of the economy, putting the country on a more sustainable path, according to people familiar with the budget proposal who insisted on anonymity to discuss forthcoming details. 

The planned deficit reduction is relative to current law, which assumes that some of the 2017 tax cuts signed into law by former President Donald Trump will expire after 2025. The lower deficit totals will also be easier to manage even if interest rates rise. Still, Biden’s is offering a blueprint for spending and taxes that will eventually be decided by Congress and could vary from the president’s intentions. 

Economy expands

The expected deficit decrease for fiscal 2022 reflects the solid recovery in hiring that occurred in large part because of Biden’s $1.9 trillion coronavirus relief package. The added jobs mean additional tax revenue, with the government likely collecting $300 billion more in revenues compared to fiscal 2021, a 10% increase. 

Still, the country will face several uncertainties that could reshape Biden’s proposed budget, which will have figures that don’t include the spending in the omnibus bill recently signed into law. Biden and U.S. allies are also providing aid to Ukrainians who are fighting against Russian forces, a war that could possibly reshape spending priorities and the broader economic outlook. 

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US Aid Will Help Europe Replace Russian LNG but Not Pipeline Gas  

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The announcement Friday that the United States will help Europe find alternative sources for the 15 billion cubic meters of liquefied natural gas (LNG) that it imports from Russia every year sparked hopes that the region can reduce its reliance on Russia for energy — but it does nothing to reduce the vastly larger amount of pipeline gas that Europe buys from Moscow.

European Commission President Ursula von der Leyen and U.S. President Joe Biden announced the agreement in a joint appearance. Biden is in Europe for a series of meetings with other leaders to coordinate further responses to Russia’s invasion of Ukraine.

In prepared remarks, Biden said that Russian President Vladimir Putin “has used Russia’s energy resources to coerce and manipulate its neighbors.” He said reducing European demand for Russian gas would increase pressure on Russia to stop the war.

He noted that the U.S. had already banned all imports of Russian energy, saying that “the American people would not be part of subsidizing Putin’s brutal, unjustified war against the people of Ukraine.”

“The trans-Atlantic partnership stands stronger and more united than ever,” von der Leyen said. “And we are determined to stand up against Russia’s brutal war. This war will be a strategic failure for Putin.”

A mammoth task

In the wake of Russia’s invasion of Ukraine, countries across Europe have been reassessing their dependence on Russia for energy. Most notable was Germany’s decision to scrap the controversial Nord Stream 2 pipeline, which would have doubled the flow of Russian gas directly to Europe under the Baltic Sea.

Completely detaching Europe from Russian energy supplies will be extremely difficult, however.

While the 15 billion cubic meters (15 bcm) of LNG that the U.S. has pledged to help Europe find would replace virtually all the LNG that comes in from Russia, the countries of Europe buy an additional 150 bcm of Russian natural gas that is delivered via pipeline.

LNG and pipeline gas are the same product in different forms. LNG is compressed into a liquid for storage and transport and is “re-gasified” for use.

Europe ‘at capacity’ for LNG

Experts said that while the new sources of LNG could replace existing Russian LNG imports, they wouldn’t be able to reduce the region’s reliance on pipeline gas.

“Europe has an import capability that is limited, and they don’t have any additional infrastructure that is going to come online,” Charlie Riedl, executive director of the Center for Liquefied Natural Gas, told VOA. “Infrastructure that’s currently operational is basically running at capacity right now, and I would expect that it will run at capacity for the remainder of this year.”

Riedl said that coming into 2022, the amount of gas held in storage by European countries was well below recent averages, making the region especially vulnerable to potential supply disruptions.

In the longer term, Europe will be able to increase its capacity to import LNG, and the U.S. in turn can then increase the amount of LNG it produces and ships to Europe. On Friday, the Biden administration said that it would commit to “maintaining an enabling regulatory environment” with regard to “any additional export LNG capacities that would be needed to meet this emergency energy security objective.”

US energy industry

U.S. energy industry representatives appeared pleased with the announcement.

In a statement sent to VOA, American Petroleum Institute President and CEO Mike Sommers said, “We stand ready to work with the administration to follow this announcement with meaningful policy actions to support global energy security, including further addressing the backlog of LNG permits, reforming the permitting process, and advancing more natural gas pipeline infrastructure.”

He said that the industry had already begun the process of supplying Europe with more U.S.-sourced fuel.

“Over the past few months, American producers have significantly expanded LNG shipments to our allies, establishing Europe as the top U.S. LNG export destination,” Sommers said. “With effective policies on both sides of the Atlantic, we could do even more to support Europe’s long-term energy security and reduce their reliance on Russian energy.”

Reconciling with climate strategy

The creation of new fossil fuel infrastructure might seem difficult to square with pledges by both the European Union and the U.S. to move toward a carbon-neutral future.

However, Biden and von der Leyen on Friday reiterated their commitment to climate pledges and said that new LNG facilities will be constructed in a way that will allow them to be converted for a transition to hydrogen-based power.

In a statement, the White House said, “The United States and the European Commission will undertake efforts to reduce the greenhouse gas intensity of all new LNG infrastructure and associated pipelines, including through using clean energy to power onsite operations, reducing methane leakage, and building clean and renewable hydrogen-ready infrastructure.”

The U.S. and the European Commission also indicated that Europe, with U.S. assistance, will take other steps to reduce reliance on Russian gas, including reducing demand by bringing more renewable power resources online.

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