Energy, Politics & Money - 16 January 2023
Independent, objective, and politically neutral analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you thrive or survive these chaotic times.
In this roundup, we take a closer look at the European Union signaled intent to counter the US Inflation Reduction Act (IRA).
EPM’s view is that the:
European assessment of IRA is probably correct in that it will pull businesses and industries away from other parts of the world, including Europe, into the US. This is already observable.
That a European tit-for-tat is justifiable from an economic perspective, but probably not conducive to trans-Atlantic collaboration, which the European probably need more than the Americans, which severely limits what Europe will feel it can get away with when it comes to subsidies.
That whatever Europe comes up with in terms of subsidies in support of green companies, this kind of support on both sides of the Atlantic, together with China’s decades long push in New Energy, is of course bullish to the energy transition.
Furthermore, we look at:
The return of the annual World Economic Forum winter meeting in Davos, Switzerland, which we at EPM do not see as an important policy setting gathering
The potential for systemic financial crisis in 2023, the risk of which would be mitigated if China could recover economically this year, and we therefore review the potential for this
The new IMF report which says that the trend toward regionalization of the global economy could reduce global economic output by up to 12%
China’s dramatic rise also in the world of science and technology, where the country now delivers the largest contribution to the top 1% most cited scientific papers globally
General Energy News
Around 900 million people in China, or 64% of the population, has contracted COVID-19 since the start of the pandemic as of Wednesday, according to a new report by local researchers, writes Nikkei Asia. The estimate was based on online search data for key phrases, like “fever”, and thus indicative only. But if somewhat accurate, it does enable estimation of when China’s economic activity might return to normal.
Macroeconomics
The World Economic Forum’s annual winter meeting in Davos, Switzerland, kicked off today. Unlike some others, at EPM we do not see the WEF as an important policy setting gathering. In our view, it is mostly about “being sees”, with presence indicating status. That said, the world’s business leaders are expected to return in pre-Covid numbers, writes Reuters, while the political leaders are mostly staying at home.
Nevertheless, Bloomberg looks at the subject that should be front-and-center of the Davos conversation. “A new age of great-power rivalry is redrawing the map of the world economy and forcing business chiefs to navigate around a growing number of global flashpoints”, it says. There is now a hot war raging in Europe, and a cold one escalating between the US and China, with the rest of the world under pressure to pick sides. New economic priorities are therefore defined by countries, to secure access to vital commodities — from natural gas to semiconductors — and use the ones they control as leverage.
Kenneth Rogoff writes for Project Syndicate, “The fact that the world did not experience a systemic financial crisis in 2022 is a minor miracle, given the surge in inflation and interest rates, not to mention a massive increase in geopolitical risk”. With inflation on the rise and the era of ultra-low interest rates over, financial markets will face a huge stress test in 2023 he says. While banking systems are more robust than they were in 2008, a real-estate slump could severely affect heavily leveraged private-equity firms, producing a systemic crisis.
On the positive side, an opinion piece in Asia Times argues an “explosive growth spurt” in the 7-8% range is highly likely for China once the current Covid wave recedes. The basic premise for this forecast is the expectation that Xi Jinping’s third term will not be characterized by further tightening of centralized controls of the economy and suppression of private-sector initiative by a tight-knit group of handpicked Xi loyalists, but rather by the very opposite. Overall, two recent developments stand out: First, the Central Economic Work Conference of December 2022, which set out economic policy for 2023, called for monetary policy support for growth acceleration. It also issued an explicit call for the rapid development of the digital economy and support for the role of online platform enterprises in economic growth. Second, Chinese households accumulated over RMB2 trillion (US$295 billion) in excess savings in 2022, which is expected to give a strong boost to consumption.
Looking further ahead, Reuters reports on a new IMF report which says that a severe fragmentation of the global economy after decades of increasing economic integration could reduce global economic output by up to 7%. But, the losses could reach 8 - 12% in some countries if technology is also decoupled.
Geopolitics
Nikkei Asia writes that Kurt Campbell, the White House coordinator for Indo-Pacific affairs made clear that in 2023, America and its allies will be looking at India as a country they want to draw more into their Indo-Pacific alliance against China. Speaking at Indo-Pacific Forecast 2023, an annual preview of political, security, and economic developments held by the Washington think tank Center for Strategic and International Studies, Campbell said, “Our interests are to see India playing an ever larger, responsible role in almost everything that we're doing”.
Energy Transition & Technology News
The European Union needs financing tools to help its clean tech compete against US rivals that are set to benefit from government support under the US Inflation Reduction Act (IRA), Ursula von der Leyen, head of the European Commission, said according to Reuters. She said the Commission was working on an assessment of what the EU clean tech sector needed to compete with US rivals. The EPM view is that, firstly, the European assessment of IRA is probably correct in that it will pull businesses and industries away from other parts of the world, including Europe, into the US. This is already observable. Secondly, that a European tit-for-tat is justifiable from an economic perspective, but probably not conducive to trans-Atlantic collaboration, which the European probably need more than the Americans, which severely limits what Europe will feel it can get away with when it comes to subsidies. And thirdly, that whatever Europe comes up with in terms of subsidies in support of green companies, this kind of support on both sides of the Atlantic, together with China’s decades long push in New Energy, is of course bullish to the energy transition.
Other
Since scientific knowledge is the origin of both money and power, we thought it worthwhile to share with you our EPM audience that according the Asia Times, Chinese scholars now publish a larger fraction of the top 1% most cited scientific papers globally than scientists from any other country. This is the result of targeted governmental policy. In 1977, Chinese leader Deng Xiaoping introduced the Four Modernizations, one of which was strengthening China’s science sector and technological progress. Over the past three decades or so, China has invested funds to grow domestic research capabilities, to send students and researchers abroad to study, and to encourage Chinese businesses to shift to manufacturing high-tech products. Today, Chinese scholars publish more scientific papers than US researchers. China is second only to the US in how much it spends on science and technology. And Chinese universities now produce the largest number of engineering PhDs in the world (while the quality of Chinese universities has dramatically improved in recent years).