This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from The i Paper. If you’d like to get this direct to your inbox, every single week, you can sign up here.
The war in the Middle East seems to be more or less over, but the damage to the world economy will continue to be felt through the rest of this year and beyond. The three main ways in which it will affect us here in the UK, and indeed across the developed world, will be higher inflation, higher interest rates and higher taxes than would have otherwise been the case. One way or another we all have to pay for it.
First, some good news. It’s that the world economy has proved itself remarkably resilient in the face of what seemed a body blow. All those alarmist stories that there would be food shortages by the summer, and of airlines fighting over dwindling supplies of jet fuel, have proved overly pessimistic.
Energy and food prices did indeed rise and airlines have cut a few unprofitable routes, but despite the fact that the Strait of Hormuz has been effectively closed since 28 February, the world economy has continued to function reasonably smoothly. In that sense, the apparently relaxed view that the financial markets took over the whole business – with US share prices shooting to all-time highs – seems to have been justified. So let’s celebrate that resilience. The world economy is a tough old beast.
The trouble is there has indeed been damage and the scars will linger for a long time. The most obvious damage is higher inflation. The UK’s latest number for the Consumer Prices Index – the metric used to measure inflation – is up 2.8 per cent on the year, which may not sound too bad but still means that prices will double in about 25 years. And it looks as though the CPI will climb to well over 3 per cent, maybe closer to 4 per cent, later this year as the increases in costs that are hitting manufacturers and service providers feed through into prices at the consumer level.
We are by no means alone here. In fact, we appear to be doing rather better than other major economies. US inflation was 4.2 per cent in May, one powerful reason why President Donald Trump was under huge political pressure to do some sort of settlement with Iran. And in Europe the eurozone inflation rate was 3.2 per cent, up from 3 per cent, an increase which forced the European Central Bank to increase its interest rates.
Higher inflation leads to higher interest rates. That is the principal weapon used by central banks to try and control it. The Bank of England will almost certainly hold rates at its meeting today, and the US will do the same. But the markets reckon that while rates may be held for some months, in both here and in America, the most likely move will be up, not down.
That is short-term rates, as set by the central banks. Longer-term ones have already risen, as they are set by investors on the bond markets. Take a crude measure, the yield (or interest earned) on 10-year UK government bonds – gilts – and the equivalent for the US and Germany.
At the end of February UK gilts yielded 4.25 per cent. Yesterday they were 4.75 per cent. For the US, the figures were just under 4 per cent and 4.45 per cent; and for Germany 2.65 per cent and 2.93 per cent. So the UK and the US are paying around 0.5 per cent more interest on our national debt and Germany about 0.25 per cent.
Half a percentage point may not sound a lot, but since the UK’s interest bill on its national debt is estimated to be at least £110bn this financial year, an extra half per cent on that is bad news for taxpayers.
As home-buyers have learnt to their cost, what the Government has to pay to fund its debt sets the base for all long-term lending rates, notably mortgages. They shot up in March and while they have come back a bit now they are still higher than they were in February.
Finally taxes. The war has affected government finances in several ways. There is the higher cost of funding the national debt, as already noted. There are the various measures governments have taken to reduce the cost of living – for example here in the UK through the cuts in VAT on theme park fees and the like. In so far as the war has damaged global growth – and the IMF reckons the cost is around 0.25 per cent for developed economies – that cuts government tax revenues and pushes up social welfare costs because as the economy shrinks, fewer people are in work, and contribute less.
It is impossible to put a precise number on what the war does to taxes, but it is, I am afraid, inevitable that they will have to go up by a bit more than they otherwise would have done. Just how much more, we will learn in the autumn.
Need to know
It’s frustrating not to be able to put more precise numbers on the cost of the war, but at least we know the direction of travel. We can run through the big macro-economic effects and the IMF does a good job on that. But when you come to the impact on the structure of the world economy, there’s really nothing much to go on. We do know that specialisation cuts costs. That’s why we have developed the just-in-time global economic model. But as the closure of the Strait of Hormuz shows, there are vulnerabilities.
The world knows it has to create a more robust manufacturing and trading structure. You don’t want to be overly reliant on any one part of the world for anything, at least as far as is practicable. But that pushes up costs. As far as the UK is concerned, we have to ask whether it is sensible to rely on imported energy to the extent we are now.
Oil and gas account for over 90 per cent of our energy imports, mostly natural gas from Norway and crude oil from the US. We also get up to 15 per cent of our electricity via undersea cables from France, the Netherlands and Belgium, though at certain times of the year we also export to them too.
Norway and the US are friendly states, and while France threatened to cut off Jersey’s electricity supply in 2021 over a fishing dispute, it never actually did so. (Jersey gets more than 90 per cent of its electricity via three cables from France, though it does have an emergency power station were the cables to be cut.)
So if we crank up North Sea gas and oil output and rely less on cables to import electricity, that would give us more security, and it would be a reasonable decision. But it might cost more than the present arrangements.
Seen in global terms, the UK’s vulnerability on the power front is a small issue compared with the world’s reliance on Taiwan for semiconductors. Since there are many other weak links in the global chains, the question really is how far de-globalisation can sensibly go. I have no easy answer to this. Trade is good. Why shouldn’t we buy things from the best sources at the best prices? But there can be no doubt that what has happened in the past four months will give another push towards nations seeking to be more self-sufficient in whatever ways they can.
Hence then, the article about i m an economist this is what trump s deal means for your money was published today ( ) and is available on inews ( Middle East ) The editorial team at PressBee has edited and verified it, and it may have been modified, fully republished, or quoted. You can read and follow the updates of this news or article from its original source.
Read More Details
Finally We wish PressBee provided you with enough information of ( I’m an economist – this is what Trump’s deal means for your money )
Also on site :