by Damon de Laszlo, ERC Chairman
It is good news all round, but it is buried in a smokescreen of political confusion. The bad news is the hangover from the economic disruption still being caused by Covid. Recurring outbreaks in China with their draconian control mechanism of shutting everything down, apparently preferred to mass vaccination, is disrupting supply chains.
The west’s dependence on China for finished goods, from clothes to washing machines, is well understood. What is less understood is the west’s dependence on China for raw materials and rare metals and earths. Over the last thirty years China has adopted a strategy of being a world supplier of these rare raw materials, expanding its own mining facilities as well as investing in mines in Africa and Latin America. It has consistently held prices low causing western production to shut down. This policy is richly rewarding for Chinese industry as the world goes electric. From super-strong magnets, required for efficient wind-generated electricity, to electric motors, and is also in alloys such as aluminium, there is a huge demand for these materials.
On the energy front, the quickest way to reduce our carbon footprint is to migrate from coal to gas. This is an interim step while other technologies, from battery storage to hydrogen production and atomic energy are developed. A major difficulty for western governments is that they must satisfy the desires and aspirations of the electorate. While the green movement has a critical role to fill in pushing government, unless it addresses the public at large, voters are not going to vote for enormous increases in energy costs. It also has to be understood that generating electricity, which is the lifeblood of today’s expected lifestyle, is not going to be solved economically by wind, solar and biomass which are helpful, but are not going to be the major energy source needed to sustain modern expectations.
What is needed is the understanding that we need drastically to reduce our output of carbon dioxide and other greenhouse gases, but the idea of zero in the foreseeable future would mean a life without modern metals such as aluminium, hugely reduced food production without nitrogen and a chronic lack of building materials without concrete and bricks, etc.
The impact of global warming is already affecting food supplies and today we are likely to be facing famine and huge increases in prices of food around the world. Fertilisers remain critical along with plastics, all products of oil and gas. Without a big increase in genetic engineering, food supplies are likely to be a growing problem over the next decade.
The United States, a late starter usually when it comes to dealing with major crises, will catch up on its decarbonisation.
China, as a planned economy, seems already to be on the case, despite the rhetoric that we hear.
India, on the other hand, lauded for being a democratic country, has a plan which is not remotely acceptable, and the government shows no inclination to take on board the issues that need to be addressed on decarbonisation of energy production, nor on addressing its own appalling poverty and food shortages.
The good news on the global warming front is that COP 26 has raised the profile of the debate in the eyes of the general public and, hopefully, this will support the political initiatives in the west.
On the economic front, western economies are growing surprisingly well and in spite of forecasts of doom. Employment generally is approaching all-time highs, reshoring and industrial investment is picking up, governments have belatedly realised that productive industries are important in a healthy economy and are encouraging rather than penalising capital investment. Wages are rising, hopefully faster than taxation but possibly not faster than inflation. Over the next twelve to twenty-four months, rising wages and the impact of inflation will improve the living standards of the top two-thirds of people in the economy, but unfortunately will be detrimental to the bottom third. This will probably lead to an increased feeling of dissatisfaction, particularly in the more depressed areas of western countries.
Central banks, however, are being slow and cautious to initiate the shutting down of the floodgates of cash that have been pouring into the economy and raise interest from the emergency rates we have become used to. Day-to-day inflation is catching up with asset inflation triggered by central bank largesse. This cautiousness is needed so as to avoid triggering a financial crisis in the debt markets. Holders of debt are going to have a horrible shock as inevitable interest rate rises take hold.
The current price rises in food, energy, rent, and motorcars are at the moment being downplayed by central banks and explained as “temporary”. The word “temporary” in bank speak is liable to extend from months to years. Covid and supply chain problems may be “temporary”, i.e., they are likely to continue for the next one to two years. However, price rises are also being driven by climate change, lack of exploration of raw materials, oil and gas, as well as an ageing population – big issues not yet being factored in.
Damon de Laszlo
8th November 2021