by Damon de Laszlo, ERC Chairman
September so far seems to be more like mid-summer with the highest temperatures on record in the UK, capping even the June heatwave. The weather pattern seems to be mirroring the UK’s national statistics that yoyo from positive to negative to positive numbers with monotonous regularity.
Central Bank announcements seem to mirror the unstable economic reporting. We analyse the Delphic words of the FED, ECB and Bank of England whose deliberations appear mostly to be based on their own domestic economics and give scant attention to their respective ROW. Inflation is mostly a global phenomenon and is transmitted across borders by movements in world trade in the medium term. Pouring money into an economy, quantitative easing, will have a short to medium term effect as the economy cannot adjust to supply and demand, but it mainly affects asset prices. Moving the interest rate lever rapidly will also change people’s actions, either encouraging or discouraging borrowing and purchases. The habit of analysing minute changes (less than 1%) in economic statistics is dangerous particularly as, as we have seen, they are subject to revisions that are far beyond the month-to-month changes.
Western Central Banks have been on an eighteen-month crusade to raise interest rates to correct their fascination with reducing interest rates to the point that policy hit the buffers. Global economies are slowing, liquidity is tightening and hopefully the Central Bankers will resist the urge to move the levers.
The Chinese economy has stalled. This of itself will impact global inflation as Chinese industry will direct more of its goods to export at a lower price in order to keep their production moving. This will impact Western production and encourage tariff barriers in the longer term. The US drive to isolate China politically and economically is supporting the US industrial revival but will be unhelpful to the greater European area. These trends, however, will in the short term bring down prices as businesses start to fail and lay off employees. It is interesting to note that house prices in general have declined and seem to be set to decline further as interest rates rise, in spite of there being a chronic shortage.
The EU’s industrial powerhouse, Germany, is already beginning to show signs of a serious recession. Their reliance on the motorcar and capital equipment industries, where China is a major market, is having serious problems. Germany has been quietly deindustrializing as its industry built manufacturing resources outside the country, the home appliance industry, has moved to places like Turkey and its car manufacturing to China, is competing with its German production. Its industries are challenged by high energy prices and a major shortage of skilled labour. With these challenges, management is reluctant to wholeheartedly invest in the electric vehicles being required by the government. It is worth noting that Chinese de-carboning efforts have meant that their motorcar industry is way ahead of the rest of the world in technology, particularly battery production.
In the context of world trade Europe and the UK, sandwiched between the two giant economies of the US and China, are likely to come off worst in an economic downturn. They also have a particular problem with bureaucracy. Layers of government, from local authorities to national governments to Brussels, are almost designed to stifle initiative and entrepreneurial activities. As governments absorb bigger and bigger percentages of GDP, their ability to stifle innovation grows. This is coupled with political desire to do things – development areas, initiatives, directions pour forth and change regularly with no thought on the impact this has on management decision taking and the time and cost required to make changes in the way a business operates. Even Germany, held up as the epitome of business efficiency, has discovered that its military procurement industry “is shackled by bureaucracy as it tries to react to the requirement to beef up its procurement to meet the Russian military threat”. Its inefficiency seems to match Britain’s abysmal record of incompetence in its military procurement programs.
The recent G20 conference produced a fascinating lesson in compromise. Countries in the NATO alliance profess to uphold freedoms around the world and are prone to intervene militarily in smaller nations but fail to stand up to India and China’s refusal to condemn Russia’s invasion of Ukraine. Agreeing to mushy words about not invading other people’s countries, without specifying Russia’s actions, seems to hugely diminish the West’s status as an upholder of freedom in the world. It’s difficult to believe that this compromise raises President Xi’s opinion of Western integrity!
A final thought on China’s long-term strategy which has concentrated for many years on projecting ‘soft power’, through the belt and road strategy. This has focused on building infrastructure that suited Chinese commercial interests, paid for by loans to individual countries for the infrastructure built in their territories! The loan arrangements gave China enormous influence over the individual countries as in many cases they look attractive to the governments concerned but, as always with loans, it is usually convenient to forget that they have to be repaid. A loan gives the lender enormous power over the management of a company and, in the case of a country, over its government whoever is in power long after the loan was originally granted.
Western sanctions against Russia following the invasion of Ukraine have cut Russia off from Western markets and, most particularly, Russian banks from not only dealing with the West but even making any transactions in US dollars. China has stepped into this financial void and enormously increased its loans to Russia which have reportedly risen from $2.2bn. to $9.7bn. in the fourteen months to March. China has interestingly refused to give military aid to Russia, which it probably calculated would damage its reputation and influence around the world, but loans will give it enormous leverage over Russia in the future.
Damon de Laszlo
11th September 2023