Six concluding thoughts

Six concluding thoughts

Ian has looked back at briefings over the years and was thinking about the patterns and the themes that emerge. Understanding this period, and thinking about what may lie ahead, six themes strike him as being of particular significance.

• First, low growth explains everything (almost). Most major economies are growing at far lower rates than they were 20 years ago. Slower growth is at the root of, or has contributed to, many of the West’s most intractable problems – everything from sluggish income growth to political polarisation, inadequate public services and high levels of government debt. This is a particular problem in Europe where trend growth has more than halved since 2006, but even the US and China have seen a material decline in their growth rates. The exact sources of the slowdown are hotly debated – ageing populations and, external shocks, including the pandemic, have clearly taken a toll – and are likely to differ by country. The challenge for governments is, to paraphrase Marx on philosophers, to find ways to boost growth rates. Supply-side reforms helped raise western growth rates between the 1980 and 1990s. The prescription today will be different, but the West needs to rediscover its appetite for pro-growth reforms.
   
• Second, GDP growth in most western economies would have been even weaker without rising levels of immigration. Immigration has bolstered growth, but it’s done less for growth in GDP per capita, which is the key driver of living standards. The effect of migration on GDP per capita depends on whether migrants work and how much they earn – skilled, high-wage migration has the most beneficial impact on GDP per capita. Strong inward migration helped boost Canadian growth in the last 15 years well above European rates. But measured in terms of growth in GDP per capita, Canada’s performance is similar to Europe’s. The benefits of strong growth in living standards have been offset by a rapidly expanding population. This can apply in reverse. Restrictive immigration policies have contributed to Japan’s extremely low growth rate in recent decades. But on GDP per capita, Japan has actually performed broadly in line with Australia, Canada and better than the UK since 2010 – a surprising finding given the gloom that so often accompanies commentary about Japan. In assessing country performance, GDP per capita warrants at least as much attention as headline GDP growth.
   
• Third, financial risk has migrated from the banking sector to government balance sheets. Tough regulation in the wake of the 2008 financial crisis obliged banks to build up capital and cut back on risk-taking. That has created a more secure, safer banking system and helped the West avoid a serious financial crisis. Government balance sheets have gone in the opposite direction. The financial crisis, the pandemic and the energy shock elicited a level of government activism and spending not seen outside wars. Government indebtedness, measured as a ratio of GDP, has surged, in the case of the US, Japan and France, to record levels. Debt ratios are at multi-decade highs in most other large, rich economies, other than Germany. Ultra-low interest rates softened the impact of rising levels of debt. With government bond yields back up to levels that were seen as normal 20 years ago, government debt is a bigger problem. That gives governments less room to borrow to fight crises. It also increases the risk of a financial crisis emanating from the government bond markets, much it did in the UK in October 2022, when the Liz Truss mini-budget triggered a selloff in the government bond market, forcing a U-turn on policy and precipitating Ms Truss’ resignation. 
   
• Fourth, geopolitics is forcing a ‘re-wiring’ of the global economy. Patterns of international trade are shifting, and supply chains are becoming longer and more complex. Trade flows are increasingly concentrated along geopolitically aligned blocs. The definition of strategic sectors and products is widening, with governments intervening to protect domestic producers or secure access to overseas supplies such as rare-earth metals and semiconductors. Technology is at the frontier of international rivalries. The US and its allies have instituted export controls, outbound investment screening and restrictions on the use of dual-use technology. Meanwhile, non-western economies are promoting the use of alternatives to the US dollar in trade and investment and are seeking to protect their financial systems against western regulation and sanctions. Globalisation is being reshaped for a more fractured and contested international order.
   
• Fifth, three industrial upheavals – in technology, energy and defence – are running in parallel. Investment is flowing into AI and associated technologies, new energy systems and into the defence sector on a huge scale. The levels of spending are breathtaking. Capital spending on AI, data centres and technology has accounted for more than half of all US growth in the last 18 months. German defence spending is set to double in the next three years.  The International Energy Agency estimates that spending on energy infrastructure and systems is running at $3.3tn a year, more than double the rates that have prevailed over most of the last quarter of a century. The race to deploy AI, for cleaner, cheaper and more secure energy and to rebuild western defences will fundamentally shape economies for years to come.
   
• Sixth, low growth is not inevitable. Periods of relatively low growth are nothing new. UK growth weakened markedly in the late 19th and early 20th centuries and again in the 1970s. Both were followed by a return to more rapid, sustained growth, aided by new technologies and, in the 1980s, by government reforms. The US economist, Robert Gordon, has argued that the West’s growth malaise today may be because we have run out of truly transformational new technologies. This is not a new idea. In the 1930s the US economist Alvin Hansen argued that the great growth boosting technologies of the past had run their course and that no new ones were in sight. Hansen’s comments preceded a half-century of rapid, technology-driven US growth. The growing capacity of AI suggests this could be that rare thing – a general-purpose technology, one that operates across the economy in a way that raises overall productivity. The steam engine, electrification and the computer were just such technologies. To me AI offers our best shot at technology-led productivity growth – and faster GDP growth - since the computer and communications revolution of the 1980 and 1990s.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 2.7% at 10,466 amid increased hope of a peace deal between the US and Iran. 

 Middle East conflict

• On Monday night the BBC reported that Iran had said that despite progress a deal between the US and Iran “is not imminent.” On Saturday, US president Donald Trump had said an agreement with Iran had “largely been negotiated” and would “be announced shortly”
• Earlier in the week, Mr Trump said he suspended a military attack on Iran at the request of Gulf states because “serious negotiations were now” taking place
• Iran’s supreme leader Mojtaba Khamenei said that Iran’s stockpile of enriched uranium must stay inside the country, according to Reuters, complicating peace negotiations with the US
• Mr Trump said that Chinese president Xi Jinping promised that China would not send military weapons to Iran
• A small number of oil tankers passed through the Strait of Hormuz last week, raising hopes that the Strait could soon open
• The price of Brent crude oil ended the week at $103 per barrel. Prices fell further on Monday to $96 per barrel
• The UK waived new sanctions on diesel and jet fuel imports that are refined in third countries using Russian crude oil, in a bid to minimise supply disruptions. This follows a similar announcement made by the US
• France’s finance minister Roland Lescure said that countries needed greater clarity on the duration and intensity of the conflict before deciding to further release oil reserves
• The market value of UK-listed housebuilders has fallen by more than £8bn since the conflict started amid rising construction costs and expectations of higher interest rates, the FT reports

Economics 

• UK activity unexpectedly declined in May, according to surveys of purchasing managers. Euro area activity also declined while activity in the US continued to expand
• The UK’s inflation rate eased to 2.8% in April, from 3.3% in March, due to a fall in the government’s cap on energy bills that was priced in prior to the conflict in the Middle East. Meanwhile, petrol prices increased 23% in the year to April, the sharpest increase since 2022
• UK government bonds saw their strongest weekly performance in nearly two years as investors scaled back their bets that the Bank of England will raise interest rates this year
• UK chancellor Rachel Reeves announced a series of measures to support businesses and families in response to higher energy prices from the conflict in the Middle East, including scrapping the planned increase in fuel duty, a £350m support package for energy-intensive businesses, and lowering VAT on attractions and children’s meals. The measures will be funded through additional taxes on energy companies
• The UK labour market continued to weaken in the three months to March, with the unemployment rate increasing to 5% and job vacancies falling to the lowest level in five years. Annual average wage growth (excluding bonuses) fell to 3.4%, down from 3.6% in February
• UK consumer confidence unexpectedly improved in May, albeit still below average levels, according to GfK
• Many UK households are not saving enough under current pension arrangements, according to a study by the UK Pensions Commission. Approximately 45% of all working-age people are saving for a pension, falling to 17% for the self-employed, the report found
• UK net migration fell to 171,000 in 2025, down from 331,000 in 2024 and to the lowest level since 2021 due to a fall in the number of non-EU nationals immigrating to the UK
• The UK signed a trade agreement with the six countries of the Gulf Cooperation Council that will remove most tariffs on Gulf imports of UK goods and ensure continued market access for UK services
• German business sentiment improved marginally in May, according to the Ifo Business Climate survey. The Ifo Institute commented that Germany’s economy “is stabilising for the time being, although the situation remains fragile”
  
  Business
• US aerospace and technology company SpaceX released its plans to list on the US Nasdaq stock exchange in what could be the largest IPO ever 
• Chinese authorities banned imports of one of US tech company Nvidia’s gaming chips while its CEO Jensen Huang visited the country during the US-Chinese summit, the latest attempt by China to advance its own AI capabilities to rival the US, the FT reports
• The US government announced $2bn of investment across nine quantum computing companies as part of the US government’s ambitions to maintain and advance its dominant global position in the industry
• Mining company Anglo American agreed the sale of its Australian coal mining operation to privately owned company Dhilmar for $3.9bn
• UK carmaker Jaguar Land Rover plans to develop vehicles in the US in partnership with rival Stellantis as part of plans to expand into the US market
• The UK government announced plans to relax ringfencing rules for UK banks in a bid to boost lending to support economic growth 
• The NHS is proposing to limit recruitment to avoid “financial ruin” and increase AI usage as part of planned reforms, the FT report
• Belfast Harbour announced a £1.3bn plan to expand capacity for its cargo, cruise and offshore wind businesses as part of long-term plans to gain dominance over its rival Dublin Port, which is expected to reach maximum capacity by 2040
• The German government announced plans to reform its military procurement agency in an attempt to improve spending efficiency of the country’s vastly increased defence budget

Global and political developments

• Chinese president Xi Jinping hosted Russian president Vladimir Putin at a recent summit, which included discussions on increasing Russian energy exports to China via the planned Power of Siberia 2 gas pipeline
• The US Department of Defence said it would reduce the number of US brigades in Europe from four to three, taking troop numbers back to levels seen before Russia’s invasion of Ukraine, amid ongoing US efforts for Europe to increase its responsibility for military defence
• UK officials are discussing further cuts to foreign aid to help fund increased defence investment, the FT reports
• The Democratic Republic of Congo is fighting a new outbreak of Ebola, with over 500 suspected cases so far
• Alberta will hold a non-binding public vote on whether residents wish to remain part of Canada or to move ahead with plans for a binding referendum on separation 

And finally… an actor playing the part of a Premier League footballer in the Apple TV series ‘Ted Lasso’ has changed career by signing up as a professional footballer for El Paso Locomotive Football Club in America’s second division – life imitating art