by Damon de Laszlo, ERC Chairman
For many people Christmas was chaotic as the Omicron variant ripped up plans for parties and Christmas family get-togethers, which in the UK was followed by the implementation of Plan B, i.e., a mild increase in restrictions much to the disappointment of health service and academic forecasters. In the UK today’s most import topic is the banning of parties, and the media had a field day promulgating a “hate Boris” campaign after ‘discovering’ he had attended staff parties in Downing Street in the summer of 2020 and 2021. There is nothing more exciting than bringing down a leader, particularly one who is intensely disliked by those who regard themselves as the most intelligent section of the community.
The UK has enormously benefited from the leadership of Boris, pushing back against the obvious pleasure the bureaucrats get from shutting everything down and deploying the precautionary principle without regard for the collateral damage to individuals and the economy. Luckily Omicron is proving to be much less dangerous than previous variants and taking a less draconian approach to it has been a risk, but the right thing to do. The USA has also benefitted from having a more laissez faire approach. Europe’s piecemeal shutdowns are doing enormous damage to its economy which is being compounded by the lack of a cohesive economic policy.
China’s centralised government and draconian Covid shutdowns are probably going to slow down its economy beyond what was already planned. This is a problem for the West as it is adding to supply-chain problems and adding to the inflationary pressures that are getting baked-in to western economies. Russia, having a government which, unlike China, has little regard for its population’s well-being, is playing a strategic power game with Europe.
2022 is, I think, going to prove to be “interesting times”. The assumption that the USA can lead the West is in doubt after a prolonged period of chaotic strategic thinking, with Europe effectively adrift and rudderless from a leadership point of view as well as from a government strategy point of view. China, under Xi, has a long-term strategy of raising the living standards of its people and flexing its muscles on the world stage. Its only disadvantage is Xi’s tendency to revert to old fashioned Communist policies of government micro-management, loading its businesses with bureaucratic requirements and damping down entrepreneurial spirit, something that was encouraged by Presidents, from Deng Xiaoping up to when Xi took office. Putin’s Russia, the smallest of the world powers in economic terms, has a leader in Putin who is an excellent strategic thinker who wants the rest of the world to acknowledge what he believes is Russia’s true status as a world power. Putin’s policy of improving its armed forces capability and focussing on weaponizing cyber space, coupled with a policy of becoming a critical supplier to the West of raw materials and energy, is throwing his weight around very effectively.
It is quite extraordinary that Europe, because of the lack of leadership and any cohesive or strategic thinking, has allowed itself to become dependent on Russian energy. It’s all very well for the USA to announce it is going to impose sanctions on Russia but the idea that Europe could stand losing 40% of its gas supplies, bringing the economy to a halt, is illusory.
The German decision, hopefully to be reversed, of shutting down its nuclear power at the same time as its coal-fired power stations is incomprehensible, and the UK government is hardly better: again, shutting down carbon-based fuel supplies with no plan to generate sufficient electricity to meet the country’s demand. The country’s lack of energy policy meant that gas storage facilities, needed to smooth demand and smooth prices, were being shut down over the last few years, showing a complete lack of competence in the government energy departments. Sadly, similar problems appear in many other areas of UK government: failure of management in Social Services, Health Services, Education Services and departments dealing with procurement of all kinds, with the Ministry of Defence serving as an outstanding example of the problem.
The issue for 2022/2023 is going to be coping with the reversing of the long-term trends of declining interest rates and low inflation. It is unlikely that the rising costs of energy and raw materials can be reversed in the next two to three years. Rising prices will lead to rising wages, inevitably at a faster rate than inflation as the government taxes a larger proportion of each pay rise. During this period, businesses with few reserves and little resilience that are limping today, will go under, which will allow for the freeing up of human resources to move into more productive occupations, but this is a painful process.
Leaving aside the issues between the East and the West, western economies are likely to grow as they restructure. But there will be many casualties and big losses for those holding fixed interest instruments and non-cash generative companies. An economic crisis is a great stimulant to new thinking and new business.
Damon de Laszlo
20th January 2022