by Damon de Laszlo, ERC Chairman
I was mildly optimistic last month, having hoped that the diminished impact of supply chain disruptions on inflation and the return of job vacancies towards normal levels indicated stabilizing conditions. It was also my hope that forecasts for the US deficit would begin to show steadiness. However, unnerving features are beginning to appear.
Money supply is still very elevated and, along with GDP growth and corporate revenue growth, are not slowing nearly enough to damp down inflation to central banks’ 2% target, particularly in the US. This means the Fed is very unlikely to lower interest rates in the near term, though there is a possibility later in the year of a very token reduction to satisfy political and financial market pressure. Driving inflationary pressures are the persistent and rising government deficit and new laws enacted to raise minimum wages and push up overtime payments in the US. Added to these, the benefit of lower import prices from China is likely to be reversed by import duties. The US Government focus on re-shoring is supercharging the trend that was already taking place and will push up US inflation while boosting economic growth and inflation. In other words, the USA, the elephant in the economic room, is stoking rather than mitigating inflationary trends around the world.
In Europe, Germany, the main economic driver, is suffering as its industry is in the crossfire between US reindustrialization, green policies hampering development, and lower energy costs, with China on the other side dominating the EV market as it controls the supply of materials for making batteries.
The Ukraine situation is at a critical point. A small country being hammered by a large totalitarian aggressor, cut off from the military resources it needs to defend itself. The US lack of support with both weapons and finance has enormously weakened the country’s forces and must have undermined its will to fight. Whether the belated provision of support is fast enough to stem the tide we will see in the next few months.
Europe’s increased rhetoric about support has hardly turned into basic military equipment and supplies to fill the gap, and the UK, while making noise, has done virtually nothing as its own armed forces have been drained of manpower and equipment over the last ten years.
So far, there is very little visibility, despite the rhetoric, of the British Government actually placing orders for the delivery of modern tanks, artillery and troop movement vehicles for the army, along with the lack of orders for modern aircraft and fighting ships in useful numbers to meet modern warfare requirements. Vanity projects make good political capital but are hardly worrying to an enemy. To see aircraft carriers that don’t work, have minimal aircraft, and virtually no support screen, is sad – and then to hear a recent announcement that the British Government is going to spend billions on developing hypersonic missiles to try and keep up with the USA, Russia and China, by deploying its own by 2030, makes one very cynical about their competence. It’s just another political PR statement that “the Government is going to do something that is world rating, making us great, etc.” Bearing in mind that government and Civil Services don’t DO anything.
The other major issue on the worry list is the need to reduce CO2 emissions to a large extent. This can only be done by finding a way to generate electricity without using carbon-based fuels. Talk of carbon capture is fine until you get rid of carbon-based fuels, but it is not a long-term solution as it is prohibitively expensive and sort of ‘bolting the door’.
China, Russia and Japan have awarded contracts for small nuclear reactors. Rolls Royce, which has built many of them to go into submarines, have said that the UK regulators have already been looking at their submissions for two years, and expect that it will take another four and a half years to assess their safety. This is before the international atomic energy authority’s efforts to harmonize regulatory standards across Europe in the foreseeable future has been successful, meaning there is little chance of meeting the deadline of 2050 to reach zero carbon emissions, which would need, by their estimate, a doubling of present-day capacity. UK and European governments prefer to squabble about political leadership and the minutiae of benefits than imparting a sense of urgency into dealing with the political issues of global warming and the increasingly dangerous military situation around the world, which is being made worse by the drastic reduction in defense capability over the last ten or twenty years.
On the good side, for the time being American prosperity is driving the world economy and we should be rocking along fairly well, at least in the next year, hopefully before any of the chickens come home to roost.
Damon de Laszlo
29th April 2024