by Damon de Laszlo, ERC Chairman
East or west, north or south, whichever way you look there is political and economic chaos. This leaves lots of room for excitement, punditry, and the general forecasters of doom. The political chaos in the UK has created great theatre but has also done considerable damage to the credibility of the political system. European politics has been less sensational as the blanket of Brussels bureaucracy dampens the underlying fractiousness of the individual states. The United States seems to be politically adrift, but less damage is done by Washington to the economy than by most other countries’ governments. However, the Supreme Court judgements are fanning the flames of political divergence. These, along with the Trump enquiry, are also undermining political trust and cohesion.
We are then left with Russia and China. Russia has become a pariah state whose importance rests on it being a major nuclear power and the controller of enormous primary resources. China, on the other hand, is a serious political and economic contender for the leadership of the world. China’s political system and its use of modern technology create an interesting dynamic in the minds of non-western aligned countries. Their steady policies of using economic power to influence Asian, African and now South American countries should be deeply worrying to western governments, but there is little sign that the West has sufficient strategic understanding to counter this influence. While the short-term political issues of the west will be resolved, the longer-term worry of the lack of strategic thinking is much more serious. We see this particularly in the lack of policy that relates to strategic materials, be that oil and gas, rare and even not so rare metals or, critically important, food.
While the inflationary pressures that we face today are partly a by-product of western central banks pouring money into propping up and trying to smooth out economic crises, the shock of Russian aggression in Ukraine and its impact on oil, gas, food and other raw material supplies compounds the inflationary problem. While central banks can affect inflationary outcomes by raising interest rates and easing off on their easy-money policies, they cannot have a big impact on food and fuel. The dislocation of western economies by central banks rolling back on credit itself is going to be considerable, as governments and the private sector are not yet paying proper attention to the lack of liquidity that will lead to the bankruptcy of masses of businesses that have been allowed to survive and, indeed, grow on debt. The forced misallocation of assets in the savings, pensions and insurance industries by central banks’ purchasing of prime debt has meant that these industries have poured money into secondary tertiary and junk debt, both government and private, where default rates are going to rise rapidly.
Adding to the chaos of the rolling back of quantitative easing and Russia’s belligerence has been the arrival of Covid which, in a very short time, crippled the world’s supply chains. World prosperity and very low levels of inflation over the past fifteen to twenty years have, to a considerable extent, benefitted from China’s arrival on the world stage as a major manufacturer. Twenty years ago, manufacturing companies discovered the cheap labour market in Asia. Investment in China was greatly encouraged, which stimulated the movement east of capital and technology. Some ten years ago, one could see the offshoring trend slowing down. In America, in broad terms, five years ago US companies were beginning to invest in manufacturing onshore, taking advantage of new technology and automation. It seems that well-run new industry companies in the US have accelerated their capital expenditure as Covid started to disrupt supply chains. The free-wheeling US economy, much less constrained by government interference and regulation, would seem to be doing what economics predicts: following investment returns in the entrepreneurial part of the economy. This trend is a cause for some optimism that a US economic recovery will surprise on the upside and break through the current doom clouds in 2023.
The Chinese state-controlled economy is recovering from Covid and will return to steady but slower growth. For Europe and the rest of the world, however, the disruption to food and fuel supplies is likely to be serious. It is difficult to suggest that starvation in Africa and a number of Asian states can be averted, as even if grain is released from Russia/Ukraine, the current harvest is in jeopardy. There are already signs that domestic food production in Europe is suffering from drought and misguided ‘green’ policies which do not auger well for the inflationary prospects where it hurts most. The other burden that is building on Europe is the potential hundreds of billions cost of rehabilitating Ukraine.
Damon de Laszlo
12th July 2022