Some good news for the UK - good material for a conclusion:

 

• Ambrose Evans-Pritchard

Europe has increasingly little to offer Starmer’s economy

Bureaucrats in Brussels are furious with the PM as they discover he is no longer ‘one of them’

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Sir Keir Starmer is embracing the concept of global Britain and pushing for closer trade with non-EU countries Credit: Anthony Devlin/Bloomberg

Ambrose Evans-Pritchard

08 October 2024 1:39pm BST

British manufacturing is in astonishingly good health, at least compared to world peers. S&P Global’s index of conditions for this country is currently the highest in the G7.

It is higher than Japan and the US, despite Joe Biden’s trillions and the money tree of the Inflation Reduction Act. It is higher than China. Mirabile dictu.

S&P Global said the UK delivered another “solid expansion” in September, with rising output and new orders. The contrast with Europe is breathtaking.

The eurozone’s manufacturing index fell to a nine-month low of 45.0, close to the nadir of the austerity crisis more than a decade ago. It was even worse for Germany.

“With orders drying up at an alarming rate, it is hard to picture any kind of recovery happening soon. What is particularly troubling, looking back over the last 30 years, is how long this slump in export orders has dragged on – it is unprecedented,” said the survey.

This divergence between Europe and the UK has been building for more than a year. It is not the mirage of a weak pound. The sterling trade-weighted index is the highest since the referendum.

Henry Anson, publisher of The Manufacturer, says British resilience is an unexpected consequence of Brexit, which shook everybody out of complacency and forced companies to restructure supply chains before the world went haywire in 2020.

“UK manufacturers have not only survived but thrived by embracing new technologies,” he said. “While the rest of Europe largely maintained established supplier relationships, UK manufacturers took proactive steps to diversify and localise their supply chains.”

Mr Anson said state policy and tax incentives for R&D have steered effort into new fields. “This forward-thinking investment is paying off, as UK manufacturers are increasingly leveraging automation, AI, and digital tools to boost efficiency and productivity,” he said.

His analysis suggests that British companies are much further along in adjusting to the trade shock of Brexit than widely supposed. We saw signs of that last year when the UK car industry secured £24bn of committed investments, a huge rebound from the seven-year drought before.

Meanwhile, the Draghi report has issued its lapidary verdict on Europe, concluding that the bloc is “stuck in a static industrial structure with few new companies rising up to disrupt existing industries or develop new growth engines”.

“With the world on the cusp of an artificial intelligence (AI) revolution, Europe cannot afford to remain in ‘middle technologies and industries’ of the previous century”, it said.

Mario Draghi, the former Italian prime minister and the report’s author, said Europe’s productivity growth began to diverge from the US in the mid-1990s because of its “failure to capitalise on the first digital revolution”.

It risks repeating the error with its heavy-handed regulation of artificial intelligence. Europe has already lost cloud computing irreversibly to America’s hyperscalers.

Mr Draghi describes a Brussels system captured by incumbents, with fatal results for its car industry. Chinese electric vehicle makers are “one generation ahead of Europeans in terms of technology in virtually all domains”. In short, he described a failing economic experiment.

You would not have known this from Sir Keir Starmer’s visit to Brussels last week. The tone was friendly – sort of – but the same old warnings of “cherry picking” abounded.

Europe’s elites still seem to assume that the UK is a demoralised applicant, and still behave as if Brussels is the imperial capital conferring favours in return for obeisance.

The Commission will continue to mark the UK’s card, trickling out market access only to the degree that Britons accept the EU’s legal and policy regime, under “dynamic alignment” and the European Court.

Sir Keir’s refusal to give up his three red lines – single market, customs union, and “free movement” (actually work and welfare rights) – has led to consternation and chagrin.

The idea that the EU might have to make real concessions is not in anybody’s mental universe. “Starmer comes with empty hands,” said German newspaper Handelsblatt.

There may be excellent reasons to rejoin the EU’s close orbit but economics is not one of them. Let us turn the argument on its head. It is becoming ever more imperative to keep a safe economic distance.

It is the rapid and open embrace of technology that turbo-charges productivity and growth, and here the EU is more of a threat than an opportunity. The UK is quietly emerging as a world player in several of the hi-tech fields that will dominate the 2030s.

Google DeepMind came out of University College London and is still based in the UK. This country has the world’s third biggest AI sector, which it is nurturing with a common law approach to risk that is radically different from the precautionary principle behind EU tech rules.

There is some truth to the old adage that common law lets you do anything unless prohibited, while Roman law lets you do nothing unless permitted.

KPMG says investment in the UK’s fintech sector rocketed to $7.3bn (£5.6bn) in the first half of this year, more than the rest of Europe combined.

London is a global player in payments and credit technology, home to Wise, Revolut, Monzo, and Starling. It is a blockchain and cryptocurrency hub. This is loosely a bet by world investors that Britain will not go the way of Europe on financial regulation.

The UK has pioneered the world’s best regime for regulating commercial nuclear fusion and is going gangbusters at the Culham cluster while Europe is still arguing about the rules, which makes it nigh impossible for companies to raise serious capital.

The same is happening with “cell-ag” – precision fermentation, and lab-grown proteins – likely to be a vast and beneficial industry for the world by the 2030s, and where the UK sits in the vanguard. Europe is hamstrung by the EU’s outdated Novel Food Regulation, reminiscent of the saga over GMO crops.

A blocking alliance of EU states says “artificial cell-based meat production does not constitute a sustainable alternative to primary farm-based production” (less sustainable than Big Ag? Really?) and poses a “threat to genuine food production methods”.

Thus speaks the vested interest of French, Spanish, Polish, and Romanian agro-industry, to the despair of the Dutch who first pioneered lab-grown meat.

There is a pervasive lack of awareness in the British debate that moving back into the EU’s legal orbit entails large and rising costs, a sort of reverse-Brexit. The UK would have to abrogate trade deals that it has signed or aims to sign soon.

It would have to leave the Asia-Latin America pact (CPTPP), already a larger market than the EU, and growing larger as Indonesia and others apply to join. Note that Labour calls the CPTPP a “real win” for British exporters. It is not retreating from Global Britain. It is angling for a US trade deal.

Britain’s ardent pro-Europeans are furious with Sir Keir Starmer for a good reason. They are discovering that he is no longer one of them.

I can foresee an industrial policy question in Paper 2 in 2024

 This article has some good elements for you to consider - should government intervene? Is it operating joined-up policy, or is it pulling in different directions to achieve different objectives? Plenty to mull over:

Britain’s new gigafactory is our entry into the global league of the EV revolution

Rishi Sunak must now ensure cheap power to meet the voracious energy needs of lithium battery plants

AMBROSE EVANS-PRITCHARD20 July 2023 • 7:15pm

Bad industrial policy is to waste public money propping up declining companies that can no longer compete on world markets. That is a bottomless pit.

The imputed £500 million subsidy to build Tata’s gigafactory for battery cells is nothing of the kind. 

It is laying the infrastructure base for a rising industry, akin to building a road or installing fast broadband. It also heads off the risk of punitive tariffs on EV exports to Europe due to local content rules in the Brexit trade deal.

Britain needs 100 gigawatts (GW) of battery capacity by 2030 and double again by 2040. The 40 GW Tata plant in Somerset, and Nissan’s 7.5 GW expansion in Sunderland, take us only a quarter of the way.

Simon Moores, head of Benchmark Minerals Intelligence, told Parliament’s battery hearings that it would require £5bn of state funding to draw in the necessary £15bn of private investment. 

“Traditional economic models do not work in this. This is a brand new industrial revolution,” he said.

Without the Tata plant as a downpayment, and the ecosystem that comes with it, the UK would have lost its footing altogether in the global switch to EVs, with little to replace the existing 200,000 jobs in combustion engines and linked supply chains. 

“Embedded manufacturing that we have now would drift away, model by model,” said Jeff Pratt from the UK Battery Industrialisation Centre.

The UK slid down the protectionist slope in the 1970s trying to save Coventry’s car industry. The unhappy saga ended in the nationalisation of British Leyland amid strikes, ‘Friday afternoon’ lemons, and a shipwreck of debts. 

The British Motor Corporation, Rootes, Standard-Triumph and Vauxhall had together been the world’s biggest exporters of cars as recently as the 1950s. The industry employed 5pc of the UK’s workforce. One can understand why successive governments could not bear to let it wither away. 

The carmakers thought Britain’s accession to the European Community would revive export sales by enabling longer production runs. Instead it was the coup de grace. It took fifteen years of hard slog and Japanese reinvention to come back from near death.

The British Leyland error today would be to scrap the UK’s sales ban on petrol and diesel cars in 2030 and try to hang on to the old order, inevitably at some point with public money and in defiance of market forces. 

That would be a certain recipe for national economic ruin, quite apart from the immense damage to the UK’s moral reputation.

“Ten years ago it wasn’t clear whether electrification would win or not. Today it is absolutely as clear as death and taxes that the auto industry is going electric,” said Andy Palmer, former chief executive of Aston Martin.

There is no turning the clock back. 

Global sales of EVs have risen 58pc over the last year. China is on track to reach eight million in 2023. Sales in Europe have risen 66pc, increasing the EV share from 10.7 to 15.1pc, despite Volkswagen bungling its pricing policy. 

New emissions standards in the US are forcing a step-change and so is the $7,500 EV tax credit under the Inflation Reduction Act. The first million EV sales took 60 months, the second took 17 months, the third took six months.

The trajectory is following the classic S-Curve of disruptive technology. The US think tank RMI thinks EV sales will reach 90pc in China and 70pc worldwide by 2030. “It’s exponential, global, and this decade,” it said.

British chemists were pioneers of lithium-ion batteries. The UK had every chance of leading as EVs took off. 

But somewhere between 2017 and early 2023, the British government dropped the ball. It pushed through the most aggressive fossil car ban in the OECD bloc without taking steps to secure strategic minerals as China launched a global land grab, and without nurturing the EV supply chain. 

“We laid down the law but we have not followed through with what UK industry needs to do to get there,” said Jeremy Wrathall, founder of Cornish Lithium.

Westminster seemed to think business could do it all alone. The EU and the US made the same mistake, but twigged earlier to the danger. 

The Tata deal comes in the nick of time and starts to close the gap. It is also a shot in the arm for a much-maligned UK economy that is not doing as badly as the global nomenklatura proclaims.

In January, EV exports to Europe will require 50-60pc of local or EU content for batteries to avoid tariffs. The terms will tighten further in 2027. 

Neither side is ready but Brussels is still playing tough, calculating that it is sufficiently far ahead with 30 gigafactory projects (some will fail) that it could peel away Britain’s EV industry in much the same way as it has tried to peel away chunks of the City. 

The Tata deal levels the playing field. 

Furthermore, it disproves the defeatist myth that the UK is too small to compete with the alleged hand-outs of the EU’s green deal. 

The Commission does not have real money, and whatever it has must be spread across 27 states. The vast headline sums are aspirational, mostly reliant on national governments and on leveraging private investment. 

Spain lost the bidding war with Britain for the Tata factory, even with EU funds.

The UK has the advanced chemical and engineering companies, and top-notch universities, needed to sustain a world-class EV industry. The British Geological Survey says it has Europe’s biggest lithium deposit near St Austell.

Cornish Lithium thinks it can extract large amounts of lithium from geothermal brine with a zero carbon footprint and at competitive cost. 

Lithium start-ups are sprouting up in the north. They may struggle to match the costs of Chilean lithium from the Atacama – mostly locked up already in long-term contracts with Asian buyers – but they could eliminate the geopolitical supply risk.

The missing link is cheap power. Lithium battery plants have voracious energy needs. “It is our greatest competitive disadvantage,” said Konstanze Scharring from the UK car lobby (SMMT).

It ought to be an urgent national priority to roll out cheap wind power as fast as possible, each watt replacing a watt of imported gas. 

Yet the Government’s overshore expansion has hit a wall. Some 5 GW of agreed wind farms are blocked because the Chancellor imposed a 45pc windfall tax on renewable companies just as they were struggling with a 30-40pc surge in turbine costs. 

Vattenfall this week cancelled the 1.3 GW Norfolk Boreas array. “It simply doesn’t make sense to continue the project,” said chief executive Anna Borg

Unlike the oil and gas industry, wind companies were denied a tax deduction against fresh investment. Which bright spark in the Treasury thought it a good idea to reduce the future supply of energy in the middle of an energy crisis? 

Rishi Sunak has redeemed himself this week with the Tata coup. At least the UK has a fighting chance of saving its car industry. Now he must convince the world that he has a credible plan to slash energy costs. Without cheap power he can kiss goodbye to everything else.

Short article on the economic contribution of the arts

The Times view on support for the arts: Golden Goose

The remarkable success of Britain’s creative industries needs to be nurtured

Tuesday March 02 2021, 12.01am, The Times

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It was a spectacular night for the British television and film industry — and not just because of the efforts that some of the country’s biggest stars had made to dress for the occasion, even while participating remotely from their homes via Zoom. Not for the first time, British talent scooped many of the biggest prizes at the Golden Globes ceremony, the first of the major industry awards of the year. The Crown won four gongs, including best actress for Emma Corrin for her portrayal of Princess Diana and best actor for Josh O’Connor, who played Prince Charles in the Netflix drama. Other British winners included Sacha Baron Cohen, Rosamund Pike and John Boyega.

It’s a reminder, if one were needed, of not only the extraordinary vibrancy of Britain’s creative industries but the remarkable contribution that they make to the economy. This is a sector that broadly defined employs more than two million people across film, television, music, theatre and galleries and which, before the pandemic, was growing five times faster than the wider economy. In 2018 it contributed more than £100 billion to GDP and generated £35 billion of exports. In recent years it has drawn substantial investment, not least from studios looking to tap British skills and talent.

Nurturing this sector should be a priority for the government. It is right, therefore, that Rishi Sunak, the chancellor, is to provide a further £400 million on top of last year’s £1.5 billion lockdown support package for the arts in this week’s budget. This will go some way to sustain the rich cultural ecosystem that includes grassroots music and theatre upon which Britain’s global creative success depends. But the sector must also now contend with a post-Brexit trade deal that makes it harder for British artists to work on the Continent. Ministers must help the industry to overcome these obstacles too if the golden goose is to continue to lay its eggs

Y13 must-read on why Germany has good prospects

 This is full of the sort of thing that you can use to add colour, evaluate, or just lament about the UK:

INVESTMENT FOCUS

The continent’s economic engine is ready to accelerate

THE MITTELSTAND REMAINS COMPETITIVE WITH GLOBAL RIVALS

Germany is the most resilient and dynamic economy in a struggling region. Matthew Partridge reviews its strengths, explains how it is rectifying its weaknesses and highlights the best ways to invest

The 2010s was a dismal decade for Europe. It began with the euro crisis between 2010 and 2015, when sharp recessions and mass unemployment devastated southern Europe; the Covid-19 pandemic has snuffed out the tentative recovery. However, while Italy and Spain languish and France stagnates, Germany, the continent’s powerhouse (it accounts for around 30% of eurozone GDP) proved resilient. Global momentum boosted its export-led economy, helping to ensure that GDP expanded by an average of almost 2% a year between 2009 and 2019, according to the World Bank, compared with an annual 1.5% for the rest of the EU. And Germany looks poised to outperform its neighbours in the next decade too, not least because it is moving beyond its traditional strengths of manufacturing and engineering into new industries. 

A BIG POST-COVID-19 BOUNCE

Germany is deemed to have dealt with Covid-19 better than most developed countries. However, the social distancing and lockdowns mean that its economy hasn’t emerged completely unscathed, with the OECD economic organisation of developed countries projecting that its GDP will fall 8% in 2020. A furlough scheme paying 60% of the salary of workers on zero or reduced hours has not been enough to stop unemployment rising to a five-year high of 6.2%.

Still, Germany has several advantages that will ensure that its economy bounces back more quickly than elsewhere, says Andrew Kenningham of Capital Economics. “Before the virus struck, Germany was growing much faster than other countries in Europe.” It is also much less dependent on consumption and tourism, two areas that have been hit particularly badly by the pandemic and are likely to be the last to recover, even after a vaccine is distributed. By contrast, the German manufacturing sector has experienced much less disruption to production and demand.

“GERMAN FIRMS ARE KNOWN FOR DELIVERING RELIABLE AND REASONABLY PRICED GOODS”

Another reason why Germany should recover relatively quickly is because of its “strong balance sheet”, says Kenningham. Germany is notorious for its puritanical distaste for government spending and debt (it is perhaps not a coincidence that the words for debt and guilt are the same in German). This meant that it went into the crisis with government debt equivalent to around 60% of GDP (compared with 85% for the UK, 98% for France and 138% for Italy). 

While public debt has jumped over the last nine months, previous fiscal rectitude reduces the need for dramatic spending cuts and tax rises now and also provides scope for further support of the economy in 2021. The public sector isn’t the only part of the economy that has been thrifty. German consumers are far less inclined to splurge than their Anglo-Saxon counterparts. Household debt in Germany is worth 54% of GDP, compared with 89% in Britain.

EXPORTS POWER EMERGING MARKETS

German manufacturing is an important engine of economic growth, says Dr Steve Coulter, head of industrial strategy, skills and sustainability at the Tony Blair Institute for Global Change. This is because manufacturing accounts for a large portion of Germany’s exports, which in turn comprise 50% of GDP (compared with 30% of GDP in the UK). What’s more, many of these exports go to the fast-growing Asian economies, especially China. While the market for cars and machine tools, two of Germany’s biggest exports, “virtually dried up overnight” during the first wave of the pandemic, it has quickly recovered.

There is always the risk that German companies may suffer from any move away from globalisation, especially if “Chinese consumers decide to start switching to domestic brands”, says Coulter. Beijing is keen for domestic companies to shed their low-quality, bargain-basement image and start developing premium products, reducing demand for foreign goods. However, this is a bigger problem for the luxury-goods sector, dominated by the likes of France’s LVMH, than for German manufacturers. The reputation of German companies is based on their ability to “deliver quality goods that are both reliable and reasonably priced”.

German manufacturing excels at producing goods that target the “upper-middle part of the market”, aimed at those who want something more than basic quality, but don’t necessarily want to pay luxury prices. While this segment may be less prestigious than goods at the absolute top end of the market, it still leads to “surprisingly high margins” for firms that can supply the emerging middle class with popular products.  Car companies, such as Mercedes and BMW, have been particularly successful in this context.

THE MITTELSTAND: GERMANY’S BACKBONE

A unique feature of the German economy is the extent to which it relies on the Mittelstand. This segment of the economy comprises a vast number of small and medium-sized firms, but also larger companies with a substantial degree of family ownership or influence that distinguishes them from traditional listed or private companies. According to the Deutsche Börse, the German stock-exchange operator, 58% Germany’s workforce is employed in the Mittelstand and it accounts for around 57% of economic output.

One of the main strengths of these firms is their ability to take a long-term view: they “spend a relatively high amount on research and development”, says Joerg Zeuner, chief economist at Union Investment. This reinvestment means that they can punch above their weight when it comes to staying “on the edge of innovation” and “developing new ideas”. They have remained competitive with global rivals in engineering and manufacturing. At the same time, they have  increasingly been moving into new sectors, such  as renewables.

Many people argue that smaller firms will always struggle to take advantage of economies of scale “and it’s certainly true that their relative importance to the German economy has slightly declined over the past few decades”, says Coulter. However, they still have several factors in their favour that bode very well for the future. While they compete fiercely between each other when it comes to selling products, “they are very good at organising collective training in order to ensure high labour productivity”. They also have good relations with their local banks, “which are much more forgiving than those in the UK”. 

BIOTECH: A NEW GROWTH SECTOR

One area that demonstrates the durability of the German model is biotechnology. Germany “has quickly become one of the leading countries in Europe for biotechnology-focused companies”, says Anthony Ginsburg, managing director of GinsGlobal Index Funds. The revenue of the German biotech sector climbed from €3.7bn in 2016 to €4.9bn in 2019. The number of German biotech firms has increased to more than 660, including 23 listed ones, with the workforce rising from 18,000 in 2015 to over 50,000 today.

A key reason for this is the large amount of money, both public and private, invested in research. If you count all universities, colleges and non-academic research laboratories, there are almost 202 research facilities in Germany. The German government is also working hard to make sure that research breakthroughs don’t just stay in the laboratory, but are turned into marketable products. It has created more than 30 biotech hubs to encourage “close collaboration between research institutes, technology parks, regional political players and biotech firms” and they are already starting to make “a big difference”.

Germany’s status as a major player in the biotechnology industry has been cemented by its performance during the Covid-19 crisis. Not only is the vaccine developed by the Mainz firm BioNTech the front runner in the race to be the first to win regulatory approval, but Bosch and Roche have also successfully developed rapid diagnostic tests, with Roche’s antibody test showing a 99.8% accuracy rate. As of last month, there are 97 Covid-19 clinical studies under way in Germany – half of which have reached the trial stage.

THE SERVICES SECTOR IS SLOWLY IMPROVING

German firms may dominate engineering and manufacturing, but there is a general consensus that “the service sector is one of the German economy’s weak spots”, says Peter Dixon, senior economist at Commerzbank. This is partly because the focus  on manufacturing has meant that the sector has  been neglected. 

Rules and regulations on anything from opening hours (good luck shopping on a Sunday) to licensing and permits, some of which date back to medieval times, are another problem. Finally, the government’s determination to balance the budget “has also limited the resources available for digital investment”. However, while “additional structural reform” is still required, [Germany’s] performance is often better than is popularly portrayed”. Pressure from the EU on Germany to open up its service sector to competition – by recognising foreign occupational qualifications, for instance, has worked. The number of foreign degrees acknowledged each year has risen to a record 36,000.

Germany’s financial sector also looks set to benefit from Brexit, in the short term at least. Britain is about to lose its “financial services passport”, which allows financial institutions to sell their products across Europe. This arrangement will be replaced with a weaker regime based on “equivalence”. As a result, says Coulter, “many banks that used to employ 10,000 people in London now typically employ 8,000 in London and 2,000 in… Frankfurt. With the EU “trying to make life difficult for London”, whether a deal is agreed or not, banks are likely to remain cautious. 

A NEW WORKFORCE

Until recently there was concern that Germany’s future growth would be hampered by an ageing workforce. At present the average German woman has 1.57 children. While this is higher than some European countries (Italy’s fertility rate is just 1.34, for instance), it is still far below the replacement rate of 2.1. As a result, Germany’s population is projected to peak in around five years’ time before falling from 83 million to 75 million by 2060. The ratio of elderly and retired people is also set to increase compared with the working-age population, slowing down growth and raising the burden on public services.

“GERMANY’S SERVICE SECTOR HAS BEEN HAMPERED BY RED TAPE; SOME REGULATIONS DATE BACK TO MEDIEVAL TIMES”

The good news is that this trend is being reversed, or at least postponed, by the increased inflow of workers into Germany. While Angela Merkel’s decision in 2015 to let in large number of refugees on humanitarian grounds may have dominated the political debate, the more important story is the “large amount of economic migration into Germany”, says Union Investment’s Joerg Zeuner. Most of this has been from within the EU, “mostly Eastern Europe, but also some migration from Spain and even Greece”. Immigration has helped bolster the fertility rate from a nadir of 1.24 in 1994.

Whatever the origins of the migrants, “they tend to be younger than the average German, which has helped improve the demographic outlook for Germany”, says Zeuner. They also tend to be relatively skilled and in some cases have even helped found new companies.  An excellent example of a company founded by first-and second-generation Turkish immigrants is BioNTech (see profile).

A BUOYANT PROPERTY MARKET

Germany’s strong growth outlook and more favourable demographics are good news for its property market, which has boomed over the last decade. While prices stagnated and even fell in real terms in the first two decades following the fall of the Berlin Wall, they appreciated by 123% between 2009 and 2019, according to Deutsche Bank. 

This has led to a “lot of hand-wringing about property prices”, says Commerzbank’s Peter Dixon.  But while there are “justified concerns” about valuations, “the simple fact is that in an environment of low unemployment and zero interest rates, property looks like a good place to be”.

Of course, a future “exogenous shock” could prompt a “correction”. However, the fact that it has “coped well with the biggest shock in living memory” this year suggests it will continue to boom. Even a reduction in bank lending, unlikely at present, won’t be enough by itself to “trigger a major turnaround”. Some ideas for investing in German property – and other promising areas – are in the box below.