by Damon de Laszlo, ERC Chairman
Since July there seems to have been a rollercoaster of news, word-bites and generally irrelevant hysteria, but during the month no fundamentals seem to have changed, except that the trends that were nascent are beginning to appear more solid. Inflation across the world is declining, it would seem to be being led by the USA, followed by Japan, France and Germany, Italy as a European outlier and the UK. While we face my often-repeated observation that Europe, UK and the US lack cohesive government, their underlying economies are running better than one might expect. Unemployment is rising slowly, but one could say rectifying the shortage of labour problems experienced in the last few years. Economies in general are slowing down, but not disastrously. The biggest worry, however, is the inability of governments to control expenditure.
The US government deficit is rising and there seems to be little political understanding of the dangers of this trend. European countries are trending the same way, and the UK is definitely rising at an unsustainable rate. The UK’s new government under Starmer kicked off with a massive hand-out to public sector unions. It is estimated that each 1%-point rise in public sector pay costs about £2.5bn. p.a. Public sector spending in July was up £3.8bn on July last year. The new Chancellor claims this is entirely due to the previous government, but she is ignoring the public sector pay rises and the fact that the economy did better than forecast.
There seems to be an underlying trend developing in the US and the UK, businesses are getting used to the vagaries and inconsistencies of their governments and getting on with investing and developing their companies. Company managements seem to be reacting less to “news” and political posturing. It is also worth noting that the higher interest rates and financial uncertainties have greatly reduced M&A and private equity activity, perhaps thus reducing the headwind for Public Company Boards making productive investments that increase general productivity.
US rhetoric and Sabre rattling about China seems to have tempered, possibly again, at least for the time being, reducing concern for corporate management and its decision taking. China itself is suffering economic malaise, following its incredible industrial development over the last thirty years. Similar to Japan, which following its post-war boom came to a juddering halt at the end of the last century as excesses in building and infrastructure development coincided with new generations who were not prepared to ‘work till they dropped’ and corporate structures that had been successful for so long failed to learn how to change and evolve. Schumpeter’s creative destruction theory is the antidote to a directed economy.
Political mistakes aside, the underlying worry about ageing populations, which is a wonderful playground for statistical extrapolation, seems to ignore technical development. The development of the newest computer chips by Nvidia is creating the opportunity for massive improvement in agriculture and medicine, both being revolutionised by genetics and the understanding of life processes.
Computer power also is beginning to have a massive impact on productivity in all areas of manufacturing. Machine learning, popularly called Artificial Intelligence, has ramifications that are as yet difficult to understand. It will have a similar, or even greater, impact than the introduction of steam, the internal combustion engine and, latterly, the electric motor. This leaves aside the more recent introduction of electronics, from television to mobile phones whose effect is more difficult to measure.
We are also at the beginning of the process of decarbonizing energy. As with most major innovative changes, it is resisted. Whether it be solar panels, windmills or atomic energy – the latter being the most important. Human nature’s resistance to change is slowing the introduction of these technologies. Probably the biggest unknown is the issue of how an ageing population, resulting from population decline, will be managed. Historic population growth was certainly unsustainable, but technology is probably the answer to keeping us healthy and useful while ageing – thoughts for the future.
Economically, we seem to be running towards a needed slowdown and recalibration of growth and the good possibility of avoiding recession.
Damon de Laszlo
29th August 2024