BUSINESS
T
hose who profess the greatest
interest in containing global
warming have the annoying
habit of undermining their
credibility by making it clear
that they have no intention of
living by the rules they impose
on others. President Biden
visited Rome for a conference on climate
change and a sit-down with the Pope at
the head of an 85-vehicle motorcade of
fossil fuel-burning, CO 2 -emitting
limousines and SUVs flown over from
America. The president then proceeded
to Glasgow, where he implored the
conferees to reduce their use of fossil
fuels while at the same time calling on
the Opec oil cartel to step up production
of crude and bring down a politically
damaging increase in petrol prices.
Hypocrisy is not solely a Biden vice.
Boris Johnson flew home to London on a
private jet to attend a dinner rather than
board a train, irrelevantly contending
that the one-hour flight spewed 15 per
cent less CO 2 than the Royals’ plane
would have done. Xie Zhenhua, China’s
climate-change envoy, professes to
believe “the challenge of climate change
is existential”, while his boss, Xi Jinping,
stayed home to explain personally to
bureaucrats the effect on their careers if
they failed to reopen coal mines and
power stations in their districts. And
America’s greens demand greater
reliance on renewables while opposing
the construction of the high-voltage
transmission lines needed to move
power from remote wind and solar
installations to where it is needed.
Progress in containing warming has
also been reduced by politicians’
assumption that the capital with which
to do the job is scarce, limited by their
ability to tax the hissing geese and run
deficits. Enter Brian Moynihan, chief
executive of Bank of America and a
member of the Financial Alliance for Net
Zero, with Glasgow lesson number one.
He rejects the idea that limits on
governments’ ability to tax and borrow
are also limits on the ability to cope with
climate change. Moynihan pointed out
that there is no shortage of capital to
cover the estimated $4 trillion required
annually from 2026 to 2030 to transition
to a carbon-free economy by 2050. It is,
he says, “not that much money”.
After deducting for investments no
longer to be made in fossil fuels, the
required annual amount comes to about
1 to 2 per cent of global GDP. That’s in
line with investment in railroads in the
1850s, in internet technology in the
1980s and housing in the mid-2000s,
writes The Wall Street Journal’s Greg Ip,
adding: “All were enthusiastically
financed by Wall Street.”
“If there’s a revenue stream, then the
funding is infinite,” argues Moynihan.
The revenue stream from the trillions of
dollars of investment will come from
wind and solar farms; substitutes for
high carbon-content steel and cement;
“climate-smart” technologies, such as
those being funded by Bill Gates and his
partners in Breakthrough Energy
Catalyst; and from the small modular
nuclear reactors being developed by
Rolls-Royce in Britain and NuScale
Power in America, to name a few.
These revenue streams are notassured — but neither were those that
financed early wildcat wells in Texas
(nine out of ten were dry), or the
horseless carriage, or petrol stations.
There will be losses. But the massive
flow of capital into all sorts of start-ups,
opaque Spacs and bankrupt companies
suggests that, at least in America, risk-
taking remains a national pastime.
For that game to be played on a level
playing field, we have the second lesson
taught in Glasgow. If we allow carbon-
laden wares to be peddled at prices that
do not include the costs they impose on
society, cleaner products are at a
disadvantage, just as products meeting
labour standards would be if competing
with illegal child labour.
The EU took the lead by announcing
plans for a carbon border adjustment
mechanism, or, more candidly, a tax onIrwin Stelzer American Account
imports with high carbon content. That
would make it easier for carbon-light
steel and cement to compete with dirtier
stuff from China and Turkey. In the US,
which leads the world in the use of clean
steel-making technologies, negotiators
are aiming to include carbon restrictions
in its trade deal, dressing them in
protectionist clothing rather than green
garb to please the trade unions.
Yes, even in a world in which private-
sector capital is relied on to contribute
to meeting whatever goals are agreed at
Cop26, there is a role for government. It
must get the incentives for investors
right by setting the prices facing
competitors in line with the true costs of
production, otherwise relatively clean
American products cannot compete
with dirtier, cheaper Chinese exports.
Now it is up to UN special envoy Mike
Bloomberg, along with former Bank of
England governor Mark Carney, to
advise governments and the financial
sector how to create revenue streams to
tap Moynihan’s infinite funding.
Doing nothing is an impossibility in
the face of green momentum and
politicians seeking to avoid irrelevance,
so increased private-sector involvement
and a beginning to the repair of flawed
pricing make Cop26 a modest success.
Worth perhaps one cheer.
[email protected]Irwin Stelzer is a business adviserThe trillions for
a carbon-free
economy is ‘not
that much money’
The economy is
still 5 per cent or
so down on where
it might have been
O
ne of the big questions for
people such as me is whether
the economic measures we
write about, like gross
domestic product (GDP),
actually relate to the
experience of people and
businesses. One of the quotes
that has stayed with me from the Brexit
vote is the one where an expert is in
Newcastle explaining the negative
impact of leaving the EU on GDP...
when a woman in the audience heckles:
“That’s your bloody GDP. Not ours.” It
would be nice if she were not
anonymous, because she deserves to be
up there alongside Brenda from Bristol,
who memorably bemoaned the
frequency of UK general elections.
You will know that we now have a new
reading for GDP, which showed that it is
getting closer to pre-pandemic levels.
We are not quite there yet, but should be
relatively soon. That will make the
pandemic recession and recovery both
the deepest and shortest in the modern
era. It normally takes about three years
to get back to where the economy was
before a recession, and after the
financial crisis of 2008-9 it took five.
I have explained before that there are
different tests on regaining pre-
pandemic levels, depending on whether
monthly or quarterly GDP figures are
used. The monthly figures for
September showed that GDP is now only
0.6 per cent below where it was in
February 2020.
On a quarterly basis, after expanding
by 1.3 per cent in the third quarter, down
from 5.5 per cent growth in the second,
GDP was 2.1 per cent below where it was
in the final quarter of 2019. That is a
bigger shortfall than in most other big
economies, reflecting the UK’s larger
slump last year.
In both cases, however, GDP should
be back to pre-pandemic levels at or
around the two-year mark — sooner in
the case of the monthly figures, maybe
slightly longer on a quarterly basis.
When we look back on this period in the
data, it will shine out as a dramatic V-
shaped recession and recovery — of the
kind I used to talk about in the darker
days of the pandemic. It has been driven
by restrictions and voluntary changes in
behaviour, and the easing of them.
It was an abnormal recession, driven
by a health emergency, and it is an
unusual recovery.
That is why, despite the views of Nora
from Newcastle — until we have a proper
name — the GDP figures tell a story that
probably fits the experience of many
people and businesses. The story not to
be taken from this is that we are having a
boom that will put the boom of 1973,
under then Conservative chancellor
Anthony Barber, in the shade.
That is because this year’s elevated
growth rate of about 7 per cent is largely
due to comparisons with weak data a
year earlier. So, after falling in the first
quarter, GDP in the second quarter was
up by 23.6 per cent on a year earlier,
followed by a 6.6 per cent increase in the
third. With numbers like this, it is not
hard to get a big annual growth figure,
and for it to read as if it were a boom.
Similarly, next year’s growth will be
boosted by comparisons with this year’sweakish first quarter. A better picture,
however, is provided by the quarter-on-
quarter and month-on-month profiles
for GDP. Growth of 1.3 per cent in the
third quarter was weaker than expected.
September on its own showed a 0.6 per
cent rise, after the economy stalled in
July and August, though September was
boosted by a big increase in “human
health activities” — in the form,
apparently, of face-to-face appointments
at GP surgeries.
Plenty of things make up GDP.
The picture that many people are
familiar with is there within the details.
Consumers are not very confident and
consumer spending in the third quarter
was 4.4 per cent down on pre-pandemic
levels. Households increased their
spending in the third quarter on eating
out and hotels, and on transport (partly
due to the petrol panic), but reduced it
on quite a lot of other things, including
clothing and footwear. Consumer-facing
services have a way to go, more thangovernment has appeared ready to add
to that damage and trigger a trade war
with the EU, because it is unhappy with
the deal it negotiated — though I suspect
after Downing Street’s recent blunders,
the prime minister will be keen to avoid
doing that.
Finally, of course, we should properly
compare where we are now, not with
where we were, but where we should
have been. If the pandemic had not
occurred, the economy would have
continued growing. Not strongly, but
growing nonetheless.
Consensus forecasts in February 2020
had the economy growing by 1.1 per cent
last year and 1.4 per cent this year,
before the pandemic struck. If we take
those as our guide, the economy is still
5 per cent or so down on where it might
have been. Some of that shortfall, the
scarring, will remain. It’s a recovery, but
not as we know it.PS
I am aware that deliveries of jokes have
been running late — mainly to do with
problems of quality control — but I can
promise you plentiful supplies nearer to
Christmas, if only cracker rejects. There
will also, of course, be the annual
Economic Outlook quiz, so there’s plenty
to look forward to on these dark days.
In the meantime, I have become a
little obsessed with one of my informal
economic indicators. No, it’s not the skip
index, which is trundling along well and
could be supplemented with a
scaffolding index, looking out as I do on
a couple of large metal structures.
It is the other index, introduced for
the pandemic, that has attracted my
attention. The station car park index
appeared to be building back to normal
quite well, from lows of just 10 or 20 per
cent usage to perhaps 80 per cent.
But then I had a closer look and
realised that people were taking
advantage of available spaces to leave a
gap between them and the next car. So
true capacity usage may be no more
than 60 or 70 per cent — well below
normal. I don’t blame them; cars have
got wider — by a fifth this century,
according to one estimate — but parking
spaces have not. I always try to park in a
slot without a car on either side, and
anybody who has seen me reversing will
know why.
So the true message of the car park
indicator is that things are still a long
way from normal when it comes to
London commuting patterns. That fits
with the Department for Transport’s
data, which shows that Tube use during
the week is between 57 and 64 per cent
of pre-pandemic levels, while London
bus usage has been running at 72 to
77 per cent of normal. Both, incidentally,
are closer to normal at weekends.
The last word on this has to go to
another informal indicator, the Pret A
Manger index — highlighted, among
others, by the Office for National
Statistics. While most of the firm’s
outlets around the country have shown
growth over the past couple of years,
London City turnover is 86 per cent of
where it was and that at London airports
just 77 per cent. Crumbs.[email protected]5 per cent, to get back to where they
were before the virus struck.
There is also a more familiar picture,
given all the headlines about shortages
recently, in industry. Manufacturing
output in September was marginally
lower than in November last year, before
the first-ever Covid vaccination, and
industry has been flatlining, in
aggregate, for many months. Chip
shortages have been a factor bearing
down on vehicle production, but other
sectors are also finding it hard to make
progress through the headwinds.
Business investment, meanwhile,
despite the massive encouragement
provided by the chancellor’s “super
deduction” tax incentive, edged up by
only 0.4 per cent in the third quarter and
remains depressed.
There are three other reasons why —
while we should celebrate the fact that
Covid did not send us into a new great
depression — the GDP month-on-month
figures are a cause for only muted
comfort.
The first is that the recovery is
bringing pain with it in the form of
higher inflation — the central reason for
weak business and consumer confidence
— and this is a story that is going to stay
with us for some time.
The second is that while returning to
where we were before the pandemic
might seem like paradise as far as
normal life is concerned, it was no
economic nirvana. We had a slow-
growing economy in which the damage
from Brexit was already apparent. TheManufacturing100 (Index February 2020 = 100)Monthly GDP105 (Index 2019=100)THE ECONOMY'S NEARLY BOUNCED BACK...
... BUT INDUSTRY’S BEEN FLAT FOR MONTHS
Source: ONSSource: ONS706080902020 20212008 2010 2012 2014 2016 2018 2020958575David Smith Economic Outlook
Wall Street will
fund green goals
No boom, this is a recovery
- but not as we know it
keep the brand going, along with jobs.
Yet we don’t know exactly what Royal
London offered; someone familiar with
LV says Bain’s bid “would had to have
been quite a lot better” to justify turning
down a fellow mutual. Other bidders
floated the idea of returning with-profit
investors’ cash, along with a share of the
fund’s surplus — but we don’t know the
details of that either. As disquiet has
grown, LV has stayed on the back foot.
The board has been worried about
breaching confidentiality by discussing
rival offers, and about frightening the
horses by saying too much early on.
There might also have been an element
of naivety at a mutual not used to the
limelight. The net result has been an
unnecessary furore, with Lord Heseltine
weighing in and pictures of Hartigan’s
home splashed across the Daily Mail.
The £100 payouts might be a red
herring and Bain might well turn out to
be a better long-term owner than Royal
London. As we report today, the latter
returned to the table with a break-up bid
recently, suggesting it’s not quite as
cuddly as it seems. But the truth is that
it’s very difficult to say. Adenoidal callsfor regulators to block the Bain deal are
misplaced; this is a free market, and
power rests with LV’s policyholders.
They haven’t been overly engaged in
the recent past. Just 40,000 — 3 per cent
— voted at September’s annual meeting.
If Cook, Hartigan and co want the
transaction to go through at two votes
next month, they should let in a little
sunlight and help them decide.Don’t let ARM wither
A different pong — the smell of death — is
gathering around US chip designer
Nvidia’s takeover of UK semiconductor
pioneer ARM Holdings. As per today’s
story, Nvidia faces in-depth national
security and competition inquiries here.
Brussels is also investigating, concerned
that Nvidia’s control of ARM’s IP could
threaten its neutral industry role.
Nvidia now looks certain to miss its
March aspiration for closing the deal,
originally announced a year ago. The
latest round of investigations must not
drag on, prolonging uncertainty for
customers and staff. If this deal is going
to die, it should be put out of its misery.
[email protected]January 2020. LV completed a deal to
sell its general insurance business to
Germany’s Allianz for just over £1 billion
and Hartigan joined as chief executive.
Hartigan believed LV was at a
crossroads, having shed its biggest
constituent. He reckoned the rump had
been deprived of investment over the
years and would struggle to go it alone.
He launched a strategic review that
explored options including a sale.
LV’s with-profits fund, which invests
for the long term in equities, bonds andT
he old joke told at City dinners
goes that a mutual is a life
insurance company owned by
the policyholders for the
benefit of the management.
We should not get too misty-
eyed about the likely
demutualisation of LV, the
insurance and investment giant formerly
known as Liverpool Victoria, even if it
can trace its roots back to 1843. As we saw
with the Co-operative Bank — which
swallowed the poisoned Britannia
Building Society, discovered it had a
£1.5 billion capital shortfall, then found
out that its chairman had an unfortunate
predilection for crystal meth — mutual
ownership is no guarantee of sound
stewardship. And as we have seen to a
lesser extent at John Lewis, it can limit a
company’s room for manoeuvre.
Nor should we buy into the lazy
outrage over LV’s suitor, Bain Capital,
being a private equity firm. It is a
reputable group, not Strip ’em and Flip
’em LLC from darkest Delaware. And
under the terms of the deal, LV’s with-
profits fund, whose 297,
policyholders currently own thecompany, will be ring-fenced. Even if
Bain wanted to plunder the fund’s
surplus through clever financial
engineering, it wouldn’t be possible.
All that said, LV has allowed a bad
smell to envelop this process.
Communication and transparency
were always going to be important in
shepherding 1.2 million members — LV’s
total policyholder base — to an emotive
and momentous vote. But from the start,
the board has failed to articulate the
rationale for a sale properly, failed to
explain convincingly why it chose Bain
over rival mutual Royal London, and —
most recently — failed to dispel a whiff of
self interest. Chairman Alan Cook and
chief executive Mark Hartigan plan to
carry on at the business under Bain’s
ownership, presumably enjoying
generous pay deals if it goes well.
LV members need to be confident that
this transaction is in their best interests,
not just those of the C-suite. Cook, who
was previously managing director of the
scandal-hit Post Office, should be acting
as their independent guardian, not
preparing to jump on the gravy train.
The immediate story goes back toSource: LV 2020 annual reportLV ARGUES IT HAS BEEN TOO FLABBY
Financial strength (capital ratio)2018 2019 2020198%244%0300%100200
172%property, is mostly closed (it offers one
remaining product). The board decided
that a sale would free it from the risks of
owning and trying to grow LV’s other
operations. The directors were
uncomfortable about ploughing some of
the general insurance windfall into LV’s
growth when most with-profits savers
wouldn’t live to see the returns. The
windfall fattened LV’s capital ratio to
244 per cent in 2019, higher than normal.
An auction attracted 12 bids. Bain’s
£530 million offer was deemed the best,
although The Times reported that LV’s
with-profits committee initially favoured
a tie-up with Royal London. Under the
Bain deal, LV’s members will get £
each — a sum described as derisory given
the thousands paid out in other cases —
and with-profits members will get 0.1 per
cent uplifts to their exit bonuses for
every year they have held their policy
since 1996. The rest will go into clearing
the with-profit fund’s liabilities.
LV insists the Bain deal gives the best
financial outcome for with-profits
members. It says that Bain, which wants
to expand LV’s equity-release business
and “smoothed” managed funds, willOliver Shah
Sunlight is the best disinfectant for
LV’s pungent sale to private equity