“The pace of change has never been this fast, and yet it will never be this slow again.”
Justin Trudeau 2018 (as quoted in Chapter 2 ‘The AI Economy’ by Roger Bootle)
While the UK Parliament struggles on and on with ever more esoteric navel gazing in its attempts to overturn the result of the 2016 referendum, Capital Economics will devote its Annual Conference tomorrow to globalisation, and the prospects for the world economy.
Meanwhile, it is one month from tomorrow that Christine Lagarde will take over the hot seat at the European Central Bank, in charge of the Eurozone; but she has already been presented with the resignation of the German board member Sabine Lautenschläger, whose normal term would have expired in 2022. There is struggle ahead in Europe, as we have forecast for the past two years.
So this commentary looks at some of the wider economic issues that could steer markets in the years ahead, whatever the end result of Westminster shenanigans - if there is, indeed, a result.
At a recent CSFI (Centre for the Study of Financial Innovation) event to celebrate the launch of Roger Bootle’s new book, ‘The AI Economy’ I asked him whether we were ever likely to see a general return to significant interest rates. My question was set in light of technology’s capacity both to introduce huge supply scalability and simultaneously to de-monetise demand. He replied that we would, and he then devoted the whole of his subsequent leader article in the Telegraph business section to this subject: explaining that it’s only a matter of time before we will see normalised interest rates again.
Although on many issues I wholly agree with Capital Economics - for example, on the dysfunctionality of the Eurozone, and on the United Kingdom’s strong prospects for growth post-Brexit - Roger and I don’t see eye to eye on this issue of interest rates and inflation. It is my belief that technology has completely changed the dynamics of demand and supply, and that we will in due course see its impact being every bit as great as the steam engine was in the Industrial Revolution.
It is technology which has driven globalisation and enabled China to challenge the United States for economic leadership. While we all feel the impact of technology in our daily lives, it has also driven the dynamics of business: those companies which do not change their operating models feel the full force of that revolution, whether they be Kodak or Thomas Cook.
It has given people the world over the opportunity to join the developed West. It has introduced huge scalability into the supply of goods and services, pushing their marginal costs down to negligible levels. And this process will go on, as automation - including artificial intelligence - provides ever greater efficiencies.
Meanwhile online delivery enables basic needs to be largely de-monetised. The only essentials which feel limitations in supply are foodstuffs, and the key challenge to their production is climate change rather than agricultural efficiency.
Which leads us to the next major economic question: should tackling climate change be seen as a challenge or an opportunity? Once again, I think it’s helpful to go back to the Industrial Revolution to see how major investment can drive economies forward.
Fuelled by invention of the steam engine, railway networks represented possibly the largest single investment of the 19th century. All across Europe and the United States, huge sums were raised to finance what must have seemed incredible feats of engineering.
Many of the bonds issued for this purpose were seriously high risk, and antique shops still hold the busted bond certificates, decades after their liquidation. I remember that, shortly before the absorption of my old firm, Wedd Durlacher Mordaunt, into the Barclays Group (to form BZW), its partners were given bundles of these busted bond certificates which, no doubt, adorn many bathroom walls today.
But the injection of economic momentum as a result of this vast expenditure on railways was massive, and I suspect that it will be the same as we move decisively towards a zero carbon future.
It therefore sounds unbelievably negative to refer to the £trillions required for alternative energy as a drag on the economy: rather, it is an investment which will boost a new wave of globalisation for the next 200 years. It should be undertaken with enthusiasm, hopefully by the large energy majors – who, if they do not make the change, will end up in the same state as Kodak and Thomas Cook.
So that leads on to the final question challenging these experts at Capital Economics: trade. There are two questions in their agenda:
- Does the trade war herald a rollback of globalisation? and
- Is Trump or Xi responsible for the trade war?
I’ll be interested to hear what the economists think, but my assessment would be ‘no, there will not be a rollback of globalisation’, and that neither Trump nor Xi is responsible for the trade war: it simply reflects the necessity to make room for a major new player in the world economy.
Tomorrow, 1st October, the People’s Republic of China will celebrate its 70th anniversary. Whatever we may think of its political and social control, there can be no doubting its extraordinary economic growth over the last half of this period to challenge the US for the top spot.
For years, Roger Bootle argued that the renminbi should be allowed to rise in value against the US$ in order to address their huge trade imbalance. However China wanted fast growth, and was happy to see itself shouldering a huge and growing stockpile of US debt to finance that growth. That transition period had to burst at some point, and Donald Trump is simply triggering that.
But, as with all bursts, levels will find a new equilibrium, and that’s the point when we’ll see these trade restrictions fall away. At that stage, the power of the Chinese consumer will be more dominant; meanwhile the United States will have gone through its own Thatcher-like business transformation in order to boost domestic productivity, taking full advantage of new technology (as we commented above).
And what of Europe?
It too will have its bursting point, as the Eurozone finally accepts that you cannot forever have Germany and the Benelux countries, whose appetite for consumption is limited, producing at too low an exchange rate while the big consumers in Italy (in particular) are held back from the opportunity to devalue their currency. However the construction of the Eurozone is much more rigid than the trans-Pacific 10-15 year stand-off; Eurozone member countries will need professional help from London in order to resolve the monetary mess to come.
I hope they will remember that over the next 2-3 weeks, as they are invited to accept an agreement for Brexit which works for the UK as well as the EU.
Gavin Oldham OBE