By Rebecca Ellis
WED 01 DEC, 2021-theGBJournal- The month of November started with the goals of saving the planet and ended engulfed in fears of a new Covid variant creating havoc to the world economy.
The COP26 climate summit has had a lot of declarations and not a lot of action. It raises the question of whether this was all just a huge waste of jet fuel. There were some positives, though. Raising awareness of climate change even in an already moderately aware environment does have some value. Companies scrambled to demonstrate their green credential because they realize that consumer do care about sustainability. There was undoubtedly a lot of greenwashing going on. So, progress even when wrapped in the spin of public relations is to be welcomed.
Everyone wants to save the planet, but no one wants higher domestic fuel bills. The energy transition is the biggest long-term infrastructure project, so far. Governments need to plan it, just as they plan motorways, airports, and broadband rollouts. For now, fossil fuels still dominate the primary global energy mix at 81%, according to the International Energy Agency. Governments have depressed investment in all fossil fuels and anxious investors have been withdrawing capital without corresponding investment in transitional fuels. This has discouraged development of natural gas, while nuclear is politically toxic, but possibly unavoidable for keeping lights on when renewable supply is low. Without a plan to grow baseline energy supply, politicians are only storing up woes for themselves and successors.
In the current Covid debate, we have reached the stage where people who are not virologists are giving their views on the virus and people who are not economists are giving their views on the economic impact of the virus. Fed chair Powell has delivered an opinion that the omicron variant of the virus poses a threat to the US economic recovery.
At this stage, it is best to reflect, once again, that the economic impact depends on people’s reactions and that depends largely on their level of fear. For the inflation aspect, it is worthwhile reflecting that the current inflation has been caused by the virus restricting supply during lockdowns while government support measures allowed savings to accumulate, representing pent-up demand. That same pattern would need to be repeated to create longer lasting inflation pressures. If fear or restrictions with fewer government support measures reduce demand without significantly changing manufacturing supply, disinflation will be the result.
So far, there have been lots of travel restrictions. This is not preventing travel except for Japan and Israel, it does add uncertainty to travel and the fear of being stranded away from home as restrictions constantly change. Fear affects economic behavior, therefore. However, fear does not appear to be affecting other consumer behavior at this stage. Unless we see a meaningful shift in consumer spending this is not something that poses a significant risk to the overall economic path. To the extent that it reinforces existing structural trends towards flatter working and online retail, it may increase economic efficiency and prove to be helpful in the longer term.
The post-Thanksgiving consumer spending in the US appears to have been somewhat muted judging from the staggering number of different indicators that are used to track activity. This may also be due to the spreading out of demand over the course of the month. But there is the fact that the lower-income consumers in the US do appear to have spent the savings they accumulated during lock-down and therefore do not have the pending firepower that they once had. That matters because if confirmed it suggests a shift to more normal levels of demand in the future and that will bring supply and demand back into balance.
For now, the energy transition will upend our energy supply and demand balance while inflation fears should finally recede. The recent correction of the financial markets offers opportunities to buy solid companies at discount prices just before the long-awaited year-end rally.
Rebecca Ellis is a Personal investment advisor, based in Zurich rebecca.ellis@pomonawealth.com|pascal.crepin@pomonawealth.com
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