by Damon de Laszlo, ERC Chairman

Damon de Laszlo

Damon de Laszlo

 

At the beginning of July most of the problems of the world had been on the agenda and discussed and debated for many months. During July and the first half of August, however, various issues seem to have coalesced and are giving more reasons for worry.

Global trade and a great deal of prosperity generated over the last decade or so has depended on the free movement of goods and people. In the last few months there has been an insidious and growing disruption to both. The shooting down of the Malaysian airliner over Ukraine has caused a hidden but very major disruption to airline routes. It had been assumed that airlines traveling at over 32,000 ft. were not vulnerable to any ground to air missiles in the hands of rebels and terrorist groups.

Today, there is a major reappraisal of the risks involved in overflying areas where there is conflict; this now includes a major part of the Middle East as well as, obviously, Ukraine. The cost of diverting aircraft to avoid these new areas of “danger” will run into tens, if not hundreds, of millions of pounds, with its knock on effect on the cost of travel and, more importantly, the cost of air freight.

Added to the threat of missile attack is the Ebola outbreak in central Africa, which again is having an impact as airlines take off their list various destinations that are deemed to be a risk, but more importantly, ill informed recommendations not to travel to central and northern Africa are having an impact. Added to these two are the tit-for-tat embargoes on Russian trade which is having a growing and potentially serious impact on the European economy in particular. As has been well rehearsed, the European banking and finance sector is fragmented and hampering recovery. Trade with Russia is important both in the agricultural sector and the industrial sector. Here the slowdown would appear to be beginning to affect German output which has been the major source of European recovery.

Industrial and commercial capital investment in general has been slow to recover after the 2007 crisis and this recovery is being further hampered by these recent events, which cumulatively are discouraging cross-border investment by international companies with the knock-on effect on domestic companies’ investment programmes.

Britain continues to escape the worst of the European structural problems, the unemployment rate continues to decline but wage rates remain flat. While there is some prospect for an improving industrial recovery, lack of any Government leadership in building infrastructure and in helping the problems of the glacial planning mechanism, particularly with regard to housing, is a major headwind for economic recovery.

The USA has, for the moment, uncoupled from the rest of the world. Low commodity prices, low energy prices, and the lack of growth in wages are fuelling a major national recovery.

While the stock market in July and August stalled, corporate earnings growth continues, which, barring accidents on the international scene, will support the stock market going forward.

China, where I was for a couple of weeks in July, is a phenomenon. The Government’s determination to reduce speculation in housing is pushing prices down. While this is good in the long term, it is not universally welcomed by the new middle classes that have been investing the majority of their savings in this market. In January people were sceptical about the Government’s policy of stamping out corruption, however the high profile arrest and the jailing of tens of thousands of middle to senior ranking officials is having a major impact. The level of scepticism is much lower but a bizarre side-effect is that it is slowing up decision taking within what is a very bureaucratic system. Civil servants would appear to have become reluctant to take decisions in case they are thought to have been taking bribes!

The drop in the sale of luxury goods and a big decline in the level of entertainment are having a big and depressing effect on the high end restaurant and luxury goods industry. While all this is good for the economy in the medium term, there is a danger that middle class dissatisfaction could boil over into civil unrest. On the international front the cadre of young basically well educated officials in the policy making area, both civil and military, are being more assertive. While senior levels of Government are holding this back for the time being, the West needs to take a more pragmatic and intelligent view of Chinese aspiration.

The Ukraine situation is probably the most dangerous flashpoint for the moment. Luckily the German Chancellor is a leader with great experience as well as being the only Western leader who can communicate with the Russian President. Hopefully Merkel/Putin can resolve what is tantamount to a civil war in the Ukraine, before the reactionary elements in both Russia and the West escalate a problem that is already nearly out of control.

Damon de Laszlo 19th August 2014

Posted by Aimée Allam