The next prime minister’s in-tray is rapidly filling up, but there’s no doubting what’s top of the pile. The next rise in the energy price cap is just seven weeks away, and much of the nation is understandably worried.
Despite the disavowals of Conservative party leadership frontrunner and heir apparent Liz Truss, the price increases are so great that some kind of giant emergency package must be assumed to be on the way. Businesses, be they energy-intensive or otherwise, will be hoping for something similar (as Michael Fahy touches on here).
The question of whether there will be enough gas to go around – notwithstanding the demand destruction that higher prices will bring – is another thing entirely, and one that has particular relevance for continental Europe. The range of possible outcomes is broad: it’s plausible that a crisis can be averted on the continent even if Russia cuts gas supplies entirely. But the growing risk to the contrary still looks underpriced by European equity markets. Notwithstanding its already low valuation, the Euronext 100 is up almost 8 per cent over the past three months. That looks bold even in the context of a global market rally.
Other countries are fighting different battles. China has no such energy concerns, but its path out of the pandemic is becoming ever harder to discern. Renewed lockdowns, however brief they may prove, continue to spring up across the country. This has particular relevance for the global economy because it suggests Beijing is, for once, willing to sacrifice economic growth for another goal. That, in turn, lowers the likelihood that the second half of 2022 will produce the kind of major stimulus for which some have been hoping. Investors who remember the way in which the 2016 spending package put a fire under equity markets could well be disappointed this year. Nor is there any guarantee that Xi Jinping’s zero-Covid policies will end once November’s party congress is over and his third term likely secured. Disruption could be on the agenda for some time, with all the attendant issues that causes for companies with interests in Asia Pacific.
Doing business in China is becoming more difficult for other reasons, too. Increased tensions with Taiwan and the US, coupled with the latter’s longstanding desire to reshore business, have resulted in president Biden this week signing into law the Chips Act. Its provisions include restrictions on companies expanding their Chinese semiconductor businesses. We’re likely to see more of the same in other industries.
As it happens, semiconductors are one part of the global economy where shortages appear to finally be easing. Yet in true whack-a-mole fashion, other deficiencies are becoming more prominent, be they essentials or incidentials. The summer drought means water shortages are (temporarily) at the forefront of the nation’s minds, and prospective gas shortfalls will occupy more and more headlines as winter approaches. For the moment, across the channel, it’s Dijon mustard that’s particularly conspicuous by its absence.
But not all shortages are so visible. Data produced by property consultancy Bidwells for the FT earlier this month show that available lab space in the UK life sciences sector is now almost non-existent, hurting start-ups’ ability to grow their businesses. The UK remains a world leader in this space, and the Oxford/Cambridge hubs are a reliable source of spin-off businesses, many of which go on to list. But private investors will know that some of these embryonic companies do not progress much past that stage before they are acquired or shift their geographical focus elsewhere. Failing to fix this issue doesn’t square with the government’s stated intention to promote investment in high-growth businesses. Ministers, for their part, say they are investing in lab capacity via their infrastructure commitments. But the search for growth and innovation is becoming more contested across the globe, and the UK should take more steps to ensure it keeps – and encourages – its leading lights. The near-term priority must be keeping the lights on, but the new government should be careful not to let medium-term priorities fall by the wayside, either.
