My thoughts on the current economic situation

As the holiday season draws to a close and we head towards September, a number of pending and actual economic train crashes may occur, following each other in quick succession. The lack of sufficient strategic thinking over recent decades across European governments will be felt with a vengeance. Power supplies across the world are under stress, but this is particularly so in our continent. The problem has been greatly exacerbated by some within the green movement, who have put political pressure on some governments to put in place wrongheaded policies (e.g. Germany’s decision several years ago to abandon nuclear power – a decision they are paying for dearly today).

Nuclear generation is a well-known technology, virtually carbon-free, and much safer than coal mining and oil drilling. It is an industry that requires long-term and consistent planning but is also opposed by many Greens. Throughout most European countries, the lack of long-term consistent policy has meant the runway for building out wind, solar and hydro energy is delayed – though worth noting the UK has been a world leader in deployment of wind and solar energy.  Further delays, with possibly more serious consequences, have been caused by insufficient clarity of policy to build out the known requirement for infrastructure.  I stress these are Europe – wide problems; in energy terms, what happens in other countries affects us here in the UK.  We are deeply interconnected.
  
The issues facing us through 2022 and 2023 regarding energy and food security are turning into a crisis. While the crisis has been brought forward by Covid and Russian terrorism in Ukraine, the fundamental issues that have been left unaddressed for the last five to ten years are going to make it far worse. Unfortunately, Western, and in particular European, economies have been further destabilised by the handling of the financial crises of the last twenty years. Central banks, theoretically independent, did not have the courage to tighten money supplies as we came out of the last financial crisis, and they needed to support huge amounts of government expenditure to mitigate the Covid pandemic. This has fuelled underlying inflation which has been added to by the fuel and food crises.

The immediate problem for the UK and Europe, in particular, is going to be the efforts of politicians like me and my colleagues to keep the lights on. I am confident that we will manage to do this but we need to provide more support for industry – particularly intensive energy users. Steel manufacturing, glass manufacturing, the raw material suppliers of building materials – bricks, etc., along with fertiliser manufacturers and the smelters of nonferrous metals, are starting to close, owing to the precipitous rise in energy costs. In a lot of these industries, the costs of re-starting after shutting down are prohibitive. Unless we deal with this soon, Europe will become dependent on American, Chinese and Russian raw material supplies.  That is not good for our economies.

The knock-on consequences for Africa and, to a lesser extent, Latin America, are deeply worrying but Asia should be less damaged. Most ASEAN governments learned lessons after the ASEAN financial crisis. They are not immune from crises, but most are much more resilient. China is problematic while it is also suffering from droughts, which are severely curtailing energy supplies in the south. Its perhaps misguided policy of dealing with Covid by locking down whole areas of population will gradually change. The government’s strategic planning to make them independent of the West, already mostly achieved for raw materials, will over a slightly longer term make them independent of western technology. The government’s long-term policy to increase the living standards of the population will probably mean that they will return to growth, albeit at a slow rate, relatively quickly.

America, which has a political and economic structure that is almost the mirror opposite of China, will also recover in the fairly short term.  I believe that the American economy is structurally in a much better position than many think.  The reshoring trends, as companies realise that automation enables them to compete with cheap labour areas and at the same time avoid long supply chains, will give America the potential for considerable growth in the next few years. In the UK we need to think hard about how we take advantage of some of these trends and strengthen our economy.

I shall write some more thoughts on both America and the UK specifically in the coming weeks.  It will be a very busy September in British politics, and November sees the mid-term elections in the US.