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You can measure the relief which met news of a ceasefire between the US and Iran by looking at the markets. The oil price has come down, shares have soared and, very importantly for all of us, the cost of borrowing for the Government has come down. But we are not back to normal, or what passed for normal before the attack on Iran. You can’t get the toothpaste back into the tube.
Here are five ways in which, in economic terms, the world will be different for all of us.
First, we will all be poorer – poorer, at least, than we otherwise would have been. This is because the disruption to the global supply chain will continue for a decade, maybe longer. The world has created a highly specialised and amazingly efficient economy, with goods and raw materials being transported huge distances from the lowest-cost producers. That is why 20 per cent of oil and gas passes through the Strait of Hormuz.
But efficiency comes at the cost of a lack of resilience. We know now, if we hadn’t fully appreciated it before, that it is wiser to pay more for security of supply. It is not simply because what has happened in the past few days has transformed the case for investing in our own oil and gas in the North Sea. We need as a country to spend more money in all sorts of ways to make us better able to cope with global turmoil. That is money that we can’t spend on other things.
Second, inflation will not come down and we have to live with that. Higher costs mean higher prices. We won’t lose control of inflation, in the sense that it won’t go to double digits or even high single ones. But 2 per cent? It is much more likely to be 3 per cent or 4 per cent for the next two or three years, probably longer. That also means high interest rates for the foreseeable future.
Thirdly, governments will face even more financial pressure than they do now. They will have to spend more on defence, maybe much more, for global insecurity, which means more emphasis on national security. They will have to try to protect the most vulnerable at a time when their own revenues will be squeezed. Maybe that will mean even higher taxes, but that will be tough to sustain given that their tax take is already at the highest level since the Second World War.
Even so, they will probably be forced to cut back on the welfare state. The debate has already shifted regarding pensions, with the triple lock of the state pension under threat and pressure on people to increase their personal provision. It will shift to other benefits because what is happening here is that a sea change that was already under way has been sped up by recent events. As governments flounder, we will have to take more responsibility for our future into our own hands.
Which leads to the fourth point, and a much-debated specific issue: pensions or property? Many people rely on their homes as a way of providing for their old age. At its simplest, they can downsize and use the money to bump up their standard of living in retirement, rather than putting more into a pension pot. That works if property keeps rising with, or even ahead of, inflation as a whole, as has happened for most of this century. But with a prolonged period of higher interest rates, coupled with rising taxation on property, it is not at all sure that prices of homes will continue to climb relative to incomes. Over the past five years, they have generally fallen, and that seems even more likely to continue.
In one sense, that should be welcome: homes have become more affordable. But it also means they will be less effective as an investment. Here again is another example of the current disruption reinforcing a trend that had already begun.
The first four examples of the long-term economic impact upon us all of the war in the Middle East are almost entirely negative. Quite aside from the economics, in human terms, it is a catastrophe. But even dark clouds have silver linings, even if they are hard to glimpse at the time. In particular, they give a spur to technical innovation. The fifth change is that in the next five years, we are going to find innovative ways of deploying new technologies in ways that will make our lives better.
It’s impossible to see any of the detail, but it is easier to envisage areas where advances might occur. For example, if supply chains become more complex, as they will, companies will use artificial intelligence to manage those more complicated trade and production flows. To start with, that is probably just a matter of holding down costs.
However, doing things cheaper leads to doing things better. I hope and think we will end up with a more responsive, nimble economy as well as a more robust one.
Need to know
In a funny way, this war is turning out very much as the markets predicted. Their initial muted response was based on the premise that it would not last very long and that, eventually, some sort of settlement would be reached.
They rather lost their nerve as the rhetoric was ramped up but even ahead of yesterday had recovered their cool and now are a long way back towards their previous reasonably positive outlook. There isn’t a settlement yet, but the way the markets moved yesterday suggests that they reckon the ceasefire will lead to an adequately secure end to open hostilities.
But as argued above, there will be lasting consequences that damage the world economy. This is part of a continuing story, and the overriding question is how well the corporations at the core of global economics adapt to very different circumstances from those of, say, five years ago. So far, they have done so adroitly. Donald Trump’s tariffs have caused far less damage to international trade than the sceptics expected. The 10 per cent chance that the ceasefire won’t hold apart, their ability to adapt should enable them to cope with this disruption too.
The thing that fascinates me most is the final point: where are the positives?
It may seem obvious, but I suspect they will come from, or at least be associated with, Artificial Intelligence (AI). We don’t know the full extent of what it can contribute to the field of human conflict, for better or worse. Better information, of course – but more effective strategic planning? Can commercial organisations apply what lessons the military has learnt?
I’ll try to get back into this in future columns, as and when more info emerges. Meanwhile, it’s a relief to have sight of those distant silver linings, even though they are far off.
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