The Sunday Times April 3, 2022 9
BUSINESS
I
f it weren’t so serious a time, “I told
you so” would be the order of the
day. American presidents from Jack
Kennedy through Ronald Reagan
and Donald Trump have warned
Germany and Europe about
excessive reliance on Russian
natural gas. In response, Germany
continues to rely on Russia for about
40 per cent of its gas, has shut down its
nuclear plants and banned fracking.
American oil and gas men have been
warning President Biden on excessive
reliance on the sun and wind while
stifling development of domestic oil and
gas resources as part of a programme to
cool the planet and cater to his green
left. He is now shopping the world for oil
and will be tapping the nation’s Strategic
Petroleum Reserve for a record 1 million
barrels every day for six months in an
effort to bring down petrol prices and
increase his party’s prospects for
retaining control of Congress this year.
British economists warned their
government that it was unwise to end
subsidies to its major natural gas storage
unit, a warning that was ignored and
leaves the country dependent on hand-
to-mouth deliveries of natural gas at sky-
rocketing prices and its prime minister
talking of relying on nuclear power, with
the private sector to build 16 small
modular reactors (SMRs) to fill the
energy gap. Cost and subsidies to be
determined. Fracking remains banned.
In short, position papers urging a
reduction of reliance on Russian gas
were ignored, leaving Putin de facto
foreign minister of much of Western
Europe. Then came the Russian
president’s decision to end the
geopolitical settlement that ended the
Cold War.
Proving Woody Allen right. In his
movie Manhattan, when a liberal at a
museum opening suggests that a
“satirical piece... on the op ed page of
the [NY] Times” should see off a planned
Nazi march in New Jersey, Allen
responds, “Well, a satirical piece in the
Times is one thing, but bricks and
baseball bats get right to the point.”
Position papers and data laying out the
danger of dependence on Russian gas
were one thing, but invading Ukraine
gets to the point. The bad guys — Putin,
Saudi and Opec leader Mohammed bin
Salman, Iran’s ayatollahs — have western
democracies over a barrel.
Biden, who removed Trump’s
sanctions that halted the construction of
Nord Stream 2, the war-stalled pipeline
that still might increase Germany’s
reliance on Russian gas, has done a
pivot. He is doing his best to make it
difficult for Germany and others to pay
for Putin’s natural gas. He is doing his
best to persuade EU countries to buy
American LNG. He is doing his best to
persuade the Opec cartel to relax
restrictions on oil production.
That effort includes the removal of
barriers to the delivery of American
missiles to the Saudis, so far with no
effect on crown prince Mohammed bin
Salman’s annoyance at being labelled “a
pariah” by the president. Biden is
hoping to strike a new deal that will
increase Iran’s oil output, enabling the
ayatollahs to buy more missiles to aim at
the Saudis who will be using American-supplied missiles to shoot down the
missiles Iran purchases with the dollars
it gets from selling oil to America.
Perhaps most significant for the long
run, Biden is recognising that his policy
responses to the siren song of his party’s
green machine are not what the US
economy needs, certainly not within the
time frame the greens have in mind.
His regulators have ended their stall
on issuing permits for the construction
of new natural gas infrastructure. His
energy secretary is asking oil men to step
up the development of America’s fossil
fuel resources — “get rig counts up” —
something they are beginning to do
while hoping they don’t sink billions into
energy infrastructure that will end up as
stranded assets if greens get control of
the policy machinery. He is allowing
Katherine Tai, his trade representative,Irwin Stelzer American Account
to fashion policies that, if properly
conceived and implemented — a big “if ”
— can move the country along the path
to a less emissions-intensive economy,
freer of dependence on unfriendly
powers, without crippling it now.
Politics and perhaps conviction
prevent the president from falling off the
climate-change bandwagon. But he now
seems willing to slow it down to give
investors, private and public, time to
ramp up alternative sources of energy.
That time might well be shortened by
market forces that seem to have driven
prices of oil and gas up to levels that
reflect the security and environmental
risks associated with their use. The risks
that a too-intrusive government will
duplicate the competence it displayed in
the withdrawal from Afghanistan are
obvious. But so, too, are the risks of
continuing down the road we have been
travelling.
Irving Kristol, whose wisdom
informed policy debates for decades,
distinguished between problems, which
can be solved, and conditions with
which we must learn to live. An energy-
thirsty world in which prices are set in
highly imperfect markets, and our
adversaries control a large portion of the
supplies needed to slake that thirst, is in
the latter category. KBO.
[email protected]Irwin Stelzer is a business adviserThe president is
doing his best to
persuade Opec to
relax restrictions
T
rade is often the poor relation
in discussions of the UK
economy, though it is one of the
most requested topics among
readers, some of whom recall
when the trade figures were the
No 1 economic indicator, often
leading the news.
There are a couple of reasons for the
Cinderella status of trade statistics. One is
that they are now published on the same
day and at the same time as a clutch of
other figures, including monthly gross
domestic product — a relative newcomer
that grabs most of the attention.
A second reason is that, in these times
of huge capital flows, trade figures no
longer move the markets in the way they
used to. The era when a bad set of trade
figures could, by putting pressure on the
pound, force interest rates up — and in
1970 may have cost Harold Wilson, then
the Labour prime minister, the general
election — are long gone.
They still tell us something, however,
and that something can be quite
important. Lost in the statistical flurry
last month was the news that the UK’s
trade deficit in January was easily the
biggest on record, at a huge £26.5 billion
for goods, and £16.2 billion for goods and
services taken together.
These were not figures for those of a
nervous disposition. The deficit in goods
is usually about £12 billion, while the
overall deficit is normally well below
£10 billion. A new method introduced by
HM Revenue & Customs at the start of
the year for collecting data on imports
and exports from the EU may have
played a part. HMRC thinks the figures
for imports have not been much affected
but that some of the sharp fall in exports
to the EU are due to the change.
Even so, the figures are a reminder
that, when it comes to the balance of
payments, the UK is pretty unbalanced.
After a temporary break in 2020, when
there was a rare surplus in total trade of
£2.9 billion, normal service was
resumed last year with a deficit of
£28.8 billion. Last year’s current account
deficit was £60 billion, 2.6 per cent of
gross domestic product, and it is
officially predicted to widen.
The deficit in trade in goods,
£129.4 billion even in 2020, widened to
£155.4 billion last year — ten times what it
was a quarter of a century ago. Forty
years ago, the UK ran a trade surplus in
manufactured goods, and up to that
point had always done so. The last time
the UK had an overall surplus on trade in
goods was also in the early 1980s, thanks
to North Sea oil.
Which brings me to one of my points
today. The UK’s oil surplus lasted until
the early 2000s but now that trade too is
in deficit, to the tune of £4.4 billion last
year and a record £1.6 billion in January.
Given the surge in oil and imported gas
prices, that deficit is only going to get
bigger, probably very significantly so.
The other worry, recently highlighted
by the Office for Budget Responsibility
(OBR) and mentioned here a couple of
weeks ago, is the UK’s disengagement
from international trade.
Trade is good: it drives productivity
and other improvements. It is no
accident that politicians of the past
lauded export-led growth. “Export orEU trade deals in
prospect will only
compensate for a
tiny fraction of our
Brexit losses
die” used to be a slogan, and in the run-
up to the 2016 referendum the Bank of
England highlighted how the UK had
become a more open economy, with
trade comprising a higher proportion of
gross domestic product (GDP) during the
long period of EU membership.
That this trend has now gone into
reverse was highlighted by the OBR.
While every other big economy member
of the G7 has seen a recovery in trade
intensity — trade as a proportion of
GDP — from the low point of 2020, the
UK’s trade intensity is now down even
from that nadir.
The OBR is sticking to its view that
Brexit will result in a 15 per cent drop in
the UK’s trade intensity. The EU trade
deals rolled over by the government,
and the new deals being negotiated and
those in prospect, will only compensate
for a tiny fraction of the losses as a result
of Brexit, according to the official
forecaster.exports (although this is an area in which
UK imports traditionally exceed
exports). Imports have also been
depressed.
However, on the same basis that saw
UK exports fall last year, and end 2021
with exports 15.7 per cent below the pre-
pandemic levels prevailing at the end of
2019, France’s exports grew by 9.2 per
cent last year, while Germany’s were
even stronger, up 9.9 per cent. You
would expect Germany to have been
even more hobbled by the impact of
supply shortages on industry.
I do not blame Britain’s exporters for
this malaise. We have some superb
exporting businesses, but they are
operating with one hand tied behind
their backs and with notably less
government help and support than
competitor countries. I don’t think a
new royal yacht, which the government
is proposing to use as part of future
export drives, will change that.
It is too late to do anything about the
main cause of this malaise: an
economically damaging Brexit done in
such a way that little or no thought was
given to the consequences. As far as
trade is concerned, things are panning
out in the manner once stupidly
dismissed as “Project Fear”. And we will
be poorer as a result.PS
Productivity figures for the UK tend to
have a depressing familiarity, one that
underlines the challenge of trying to put
in place any meaningful levelling-up
agenda, which I am not sure that the
government is any more.
Sure enough, a new analysis by the
Office for National Statistics of
productivity in towns and travel-to-work
areas shows that, for large conurbations,
productivity in the greater southeast is
61 per cent higher than in the rest of
England and Wales. The gaps are smaller
for large towns (13 per cent), small towns
(7 per cent) and rural areas (19 per cent),
but they are still there. London’s
productivity is 55 per cent higher than
the average for other UK cities.
If this suggests that the country is a
productivity wasteland outside London
and the southeast, that would be unfair.
There are pockets of high productivity in
towns and travel-to-work areas outside
the region, including Leamington Spa,
and Girvan, Edinburgh, Livingston,
Peterhead and Aberdeen in Scotland.
But there are also large swathes of the
UK where there are no places with
above-average productivity. That
includes the northwest, Wales, Devon,
Cornwall and the East Midlands. The
closest any part of the northeast comes
to average UK productivity is in
Sunderland, which must be the effect of
the Nissan plant there.
What drives these productivity
differences? Areas with a higher
proportion of jobs in high-tech services
and other knowledge-intensive sectors
have the highest productivity.
Sometimes, however, the differences are
hard to explain. Towns outside the
southeast often have lower productivity
even when they have a similar industry
mix, because of productivity differences
within sectors.
[email protected]Rishi Sunak, who supported leaving
the EU, like many who work or worked
for hedge funds, reluctantly conceded in
evidence to the Commons Treasury
committee last week that Brexit was
inhibiting UK trade. Boris Johnson,
asked the same question by the
Commons liaison committee, suggested
it was because exporters were not trying
hard enough. I know which one of them
I would believe on anything to do with
economics.
The UK’s disappointing recent trade
performance goes deep. World trade in
goods and services grew by a hefty
9.3 per cent in volume terms last year,
according to the International Monetary
Fund. Yet UK exports of goods and
services fell by 1.2 per cent on a balance
of payments basis.
Exports of goods fell by even more last
year, by 2 per cent from depressed 2020
levels. A couple of years into his
chancellorship, George Osborne set out
his ambition for doubling UK exports.
Well, the volume of exports of goods and
services last year was the lowest since
2014, while exports of goods were last
lower in 2010, when the economy was
recovering, bleary-eyed, from the
financial crisis.
You might say that 2021 was a year
when the economy was recovering from
the pandemic, so some disappointment
was inevitable. Certainly, manufacturers
were beset with supply shortages, and
some service sectors, notably travel and
transport, were a long way below
normal levels, depressing service-sector2016 2017 2018 2019 2020 2021... AND HAS MISSED A WORLD TRADE UPTURN
Source: OBR105 (Index, 2019 = 100)100959085Other G7
countriesSource: ONSBRITAIN HAS LURCHED FURTHER INTO THE RED ...
2016 2017 2018 2019 2020 2021-30-25-20-15-10-5UK trade de icit in goodsUK Trade-to-GDP ratio£0bnDavid Smith Economic Outlook
Biden wakes up
from green dream
UK exporters are struggling
- and it isn’t hard to see why
profit-and-loss accounts. He adds that
inflation is so volatile, price reductions
would not immediately “cut through” as
shoppers are bamboozled by the
constant variations. He gives the
example of petrol: as you drive around,
do you really notice which forecourts are
snaffling chancellor Rishi Sunak’s 5p fuel
duty cut for themselves and which are
passing it on to motorists?
In properly functioning markets, this
should soon change. One player should
decide to sacrifice short-term profits in
favour of top-line growth and start a
price war. Usually, angry consumers
flock to their banner and rivals are then
forced to chase prices down.
The broadband industry’s behaviour
last week does not inspire confidence. A
generation of challengers such as
TalkTalk has become part of the status
quo (Aldi and Lidl fit into this category in
food retail). The time is ripe for a new
wave of insurgents. History tells us that
when incumbents unjustifiably prioritise
profits over sales, hungrier newcomers
break in and eat their lunch. A unique
brand like Chanel might get away with
ripflation. Other opportunists won’t.Budweiser’s sour taste in Russia
When is leaving Russia not really leaving
Russia? Budweiser megabrewer AB
InBev won plaudits for announcing that
it had asked its Turkish joint venture
partner there, Anadolu Efes, to suspend
the Bud licence on March 11. Two days
later, though, Efes said reports about the
group leaving Russia were “not true”.
Since then, the joint venture has
advertised more than 50 job vacancies.
Western rivals pulling out suspect it has
been pitching bars and restaurants for
their business. US-listed AB InBev owns
50 per cent of the joint venture, plus a
24 per cent stake in its holding company,
so should be able to bring pressure to
bear. Yet some suspect AB is turning a
blind eye as Efes continues to do
business in a lucrative market.
Carlsberg, the no 1 in Russia with a
share of almost 30 per cent, is quitting.
So is Heineken, the no 3. AB, the no 2
with 27 per cent, is at best being unclear
about its intentions. It makes you
wonder just how permanent other
western brands’ “suspension” of their
Russian activities will turn out to be.
[email protected]Or take food. Fertiliser prices are
spiralling, putting pressure on farmers
to raise the price of crops. This is partly
due to Russia’s war on Ukraine — Russia
was a big fertiliser exporter — but partly
due to big western players pushing up
prices far above the rate of inflation. Last
week, the Financial Times noted that
Nutrien, one of America’s two providers
of potash, claimed to have suffered a
51 per cent rise in the cost of goods for
making nitrogen, a key ingredient. The
company’s margins were up almostC
hanel handbags now increase
in price at such a rate that
Sotheby’s mentions them as an
alternative to the tech-fuelled
S&P 500 index. The medium
classic flap retailed for $1,150 in- Today it’ll set you back
$8,800. Much of that upswing
happened during and after the Covid
pandemic: since the end of 2019, the
French luxury brand has raised the
prices of its bags by an average of 71 per
cent, according to the bank Jefferies.
Chanel has blamed currency changes
and higher production costs, and cited
its desire to “harmonise” prices globally.
These might all be real factors. But it has
also been pushing aggressively into a
new price bracket, seeking to be seen
alongside the more exclusive Hermes.
Chanel has done so under cover of the
post-Covid inflation dominating western
economies. Last week a blogger coined a
term for this sneaky, wilful jacking up of
prices in an environment where inflation
is rampant: ripflation — as in “rip-off ”.
Handbags aren’t my métier. I’m sure
those who view Chanel’s as essentials
can afford to suck up the price rises.
But inflation-busting increases are
going through on other products too,
and many have a more direct bearing on
everyday living standards. While most
companies are grappling with soaring
input costs, there is a sense that certain
bosses are excessively protecting
margins at consumers’ expense. Food
poverty campaigner Jack Monroe drew
attention to the fact that shoppers were
not feeling the effects of inflation
equally. The same is true of companies,
yet price rises are everywhere.
Take broadband. Last week, BT, EE,
Plusnet, TalkTalk and Vodafone all put
up prices by more than 9 per cent — well
ahead of February’s 6.1 per cent CPI
inflation rate. Yes, the telcos are being
forced to swallow an inflationary
cocktail of rising energy, equipment and
staffing costs. BT had been considering
its move for almost two years. But the
“optics” of the sector pushing through
price rises in lockstep are unfortunate.
Or take drinks. Pret A Manger’s filter
coffee has gone from 99p to £1.50 — a
50 per cent premium. And it has put up
its coffee subscription scheme by 25 per
cent, from £20 to £25 a month.Corporate pro its are at record levels
FTSE 100 pre-tax pro itsSource: AJ Bell analysis of company accounts, Marketscreener and
analysts’ consensus forecasts£300bn501001502002502006 2010 2015 2020Forecastsevenfold in the same quarterly period.
Ripflation has so far sparked more
debate in the US, where corporations
posted their fattest ever profits last year
— $2.8 trillion, up 25 per cent on 2020.
Elizabeth Warren, the left-wing senator,
wrote to the Department of Justice in
February urging it to probe “corporate
greed and anti-competitive behaviour”,
which she said were driving inflation.
A similar backlash could happen here
if boards aren’t careful. FTSE 100 profits
hit a record £220.5 billion last year,
according the broker AJ Bell. They are
predicted to keep rising. Buoyant share
prices will unlock big executive bonuses.
Any perception that bosses are raking in
paydays funded by above-inflation price
hikes would be socially toxic when
families face rising council tax, energy
bills and national insurance payments.
Friday was when the cost-of-living
crisis became reality for many — the
Daily Mirror dubbed it April Cruel Day.
The crunch begs an obvious question:
why are companies not more concerned
about losing customers, and sales?
A veteran retailer suggests they are
still more worried about safeguardingOliver Shah
Handbags at dawn: ripflation will stoke
the wrath of hard-pressed consumers