by Damon de Laszlo, ERC Chairman
Since putting pen to paper in February, there has been a more than usual amount of trivia in the headlines. The global economic expansion has steadied and in many areas, the rapid growth of last year has dropped to more realistic single digit figures. The flattening of the rate of growth of the last two years is not helping business confidence when layered on the political uncertainty in the UK and Europe. Constraints on economic growth are also coming from the lack of capacity in areas of the global supply chain; the inter-dependence of companies on suppliers from around the world is becoming apparent.
In the electronics industry growth is being hampered in unexpected areas by the lack of capacity in what are called ‘passive components’. The world is highly dependent on Japanese companies for the supply of passives, resistors and capacitors, and Japanese management has apparently little appetite to grow their businesses. On a different front, a lot of growth in the last few years has been financed by private borrowing and the numbers from the US and Europe are getting back up to levels not seen since the crisis of 2008; the lack in the growth of wages has been taken up by borrowing, a trend that cannot continue. The same can be said for governments. It would seem that most democracies, with the exception of Germany, have given up on trying to balance budgets. Quantitative Easing has meant that governments have been able to avoid their historic primary function of managing their expenditure prudently. The unsustainable trend is probably in the process of being reversed.
Another headwind to economic growth is Western politics, which became beset by minority groups who use internet technology to mount focussed attacks on individuals, in particular politicians and anyone who displeases factional interests. When newspapers were the primary source of information, there was an ability for editors to exercise some judgement on what was published. Today the internet enables hidden attacks on individuals by small groups, which makes anyone in a position of responsibility vulnerable to bullying. The most recent example in the UK was the resignation of the Home Secretary, Amber Rudd, after a sustained and basically unjustified media feeding frenzy because she was apparently not given a copy of a memo by her civil servants. The idea that it would be humanly impossible for anyone to read and absorb copies of the thousands of documents that fly around government departments, unsurprisingly clearly did not occur to the mob of attackers.
The UK, in particular, is suffering along with a number of other countries from a deterioration in the mechanisms of government. While Ministers are held responsible for the incompetence of their departments, they have virtually no ability to do anything about it. We constantly read of appalling negligence cases in social service departments, the Home Office, health services and the legal system, but no apparent action is ever taken to discipline or correct the miscreants, which must be very demoralising for anyone who is competent and works hard in these departments. Complex regulation creates uncertainty and inevitable bureaucratic confusion and paralysis.
As a country, the UK parliament is riven by factions and bogged down with Brexit and the apparently impossible task of negotiating with a civil servant in Brussels, whose primary intent is to avoid agreement. At home there is a civil service that seems to have an agenda of its own, leaking documents designed to destabilise the government; to quote the Financial Times “The British state is set up for low key shambles”.
The USA on the other hand has a revitalised economy. The Trump Effect of being unpredictable, ungracious and unperturbed by conventional norms has so far positively impacted the economy. Tax reforms have been made, negotiations in Korea have started, and impetus has been given for Chinese trade re-balancing. TrumpEurope relations, however, are a worry. Whereas the government of China is super competent and understands real politics, Brussels cannot be trusted to negotiate. There is a danger that the EU will box itself into a stand-off as it is likely to fail to take a political and pragmatic approach.
The optimism of steady economic growth and political stability left over from the spring seems to be waning. There are a number of chickens coming home to roost, as long-running trends in interest rates and borrowing start to reverse. There is no fundamental reason why changing trends should precipitate crises but in over-extended areas of the economy where borrowing has been excessive, sudden changes of sentiment can easily happen.
Irrational exuberance can easily turn into irrational pessimism.
Damon de Laszlo
3rd May 2018