Mapping our estimates of the natural rate into growth and demographic drivers, we find that these two contributing factors can explain most of the decline seen since the 1970s. Going forward, economic and population projections look stable, and forecasts of continued slow growth and further aging in the advanced economies in coming decades would mean that natural rates will remain lower for longer absent any other major shocks.
This is a striking illustration of how the global contributors to interest rates have become an increasingly important factor.
2. A reality check on India's electric vehicle (EV) industry. Consistently on two-wheelers, three-wheelers, four-wheelers and buses, actual sales have fallen far short of the government's targets. Worse still the growth momentum is flagging.
3. Industrial Policy is back with a bang in the US. In the span of less than a year, the US has passed three legislations - Infrastructure Investment and Jobs Act in late 2021, Inflation Reduction Act and Chips and Science Act in August 2022. These policies are critical to incentivise investments
“The IRA really underpinned the business case to stay here,” adds Jorg Heinemann, chief executive of EnerVenue, a US battery company building a $264mn factory in Kentucky. “Take away the IRA, now it becomes a much more difficult equation . . . the pull of Asia would have been difficult to resist.”
And the scale of these policies have generated severe backlash (and emulation) among US competitors,
Ever since the Biden administration passed the Inflation Reduction Act and the Chips and Science Act for clean energy and tech last year, there has been a mutinous mood among some American allies in both Europe and Asia at the scale of the new US subsidies. What the US sees as a strategy to reverse deindustrialisation in deprived areas, allies have interpreted as a thinly veiled exercise in protectionism because it encourages companies to shift plants and customers to Buy American...
After several decades when the US has used its influence at institutions such as the World Bank and the IMF to pressure governments to cut back subsidies, many have been quick to call hypocrisy over Washington’s new embrace of industrial policy. Europeans, in particular, are anxious about the competitive threat and the risk of seeing some of their industrial base migrate to the US. Yet as the dust has settled in recent months, the reaction has shifted from anger to a search for ways to catch up. The EU, Japan and South Korea have all introduced subsidies for their tech and clean energy sectors, in order to attract new investment or prevent more companies from shifting to the US...
Many of the incentives are focused on businesses that assemble products in the US, which encourages companies to move production there. And not only do they qualify for the massive subsidies on offer from the Biden administration — they can also benefit from lower energy costs and taxes. Meyer Burger, a Swiss-based solar technology company that has three plants in eastern Germany, warned last month that it would build its new solar cell factory in the US rather than Germany unless Berlin provided more financial support... The IRA has prompted an investment spree by Japanese manufacturers with Panasonic, Toyota, Honda, Bridgestone and others announcing additional spending plans in the US... South Korean companies have also been among the largest investors in green technologies in the US since the IRA was passed last year... by 2026 Korean battery makers will stand to collect an annual collective subsidy from the US taxpayer of upwards of $8bn from the IRA’s “advanced manufacturing production credit” alone.
Others too are following the US in adopting the green transition industrial policy
Analysts stress that European countries have already developed a green agenda that incorporates tens of billions of euros of subsidies. While the US regime offers subsidies worth $7,500 an electric car, for example, the average in the EU was already €6,000 per vehicle in 2022. Under the €800bn NextGenerationEU Covid-19 recovery programme, member states are required to commit at least 37 per cent of spending to the green transition. This comes on top of a regulatory framework that uses a carbon price, via the EU Emissions Trading System, to drive up investments in renewables and greener technologies... The European Commission last year relaxed its strict state-aid rules, giving member states more leeway to help their companies get through the turbulence triggered by Russia’s invasion of Ukraine...
The new “temporary crisis and transition framework” (TCTF) allows EU countries to provide subsidies to companies making things like solar panels, wind turbines, heat-pumps and the electrolysers needed to produce green hydrogen, as well as carbon capture and storage projects... The TCTF framework is now being used to help solar companies, too... South Korea has responded to the US subsidies with a semiconductor package of its own, the so-called “K-Chips Act”. Passed in March, the legislation boosted tax credits for companies investing in manufacturing of “national strategic goods”, including semiconductors.
This is an interesting point about the contrasting nature of their policies,
Businesses praise the relative simplicity of the US offer, which focuses on uncapped tax incentives targeted at manufacturers. By contrast, EU attempts to forge a convincing green industrial policy have been undermined by a patchy regulatory framework and complex processes for accessing multiple pots of money... “The risk is that the EU’s response to the IRA will in the end be too little, too late,” says Südekum, the German academic. “The programmes are too complicated and are getting bogged down in details.”
The scale of the intervention is staggering and poses dangers of distortions, inefficiencies, and wastages,
Nowhere have the risks of such a contest been more obvious than in the case of Intel’s big new German investment. The chipmaker had announced plans last year to invest €17bn in two new fabrication plants or fab in the eastern German city of Magdeburg. The German government had promised to subsidise the project to the tune of €6.8bn. But then Intel said it wanted more, citing higher energy and construction costs. In the end, the government agreed to raise the level of subsidy to €9.9bn, though Intel also announced it was increasing the investment volume from €17bn to €30bn. “There’s a lot of subsidy shopping going on at the moment,” says Moritz Schularick, head of the Kiel Institute for the World Economy in Germany. “Companies can say to politicians here: ‘we get more funding in the US’, and that can convince them to shell out even more money.”
Many orthodox economists in Germany have expressed horror at the level of subsidies being offered to companies like Intel. Such support — and the mere suggestion of “industrial policy” — is an affront to German “ordoliberalism”, with its rejection of state intervention in the economy and its abhorrence of subsidies or tax privileges. Habeck admits that subsidies go against the grain of “pure economic theory”. But the Europeans had no choice but to match the huge incentives on offer in the US and China, which are attracting billions of dollars in investment. “We have to decide: do we continue to act according to what’s in our textbooks?” he told the Süddeutsche Zeitung at the end of June. “If we do, we won’t have any of the key industries of the future.”
4. China's dominance of the supply chain for critical minerals
This is a staggering level of dependence,
China for example last year exported 86.6GW of solar panels to Europe, a 112 per cent increase on 2021’s figure, according to InfoLink Consulting. “If we are going to hit our 2030 [climate] targets we need China,” says Jacob Kirkegaard of the Peterson Institute.
5. The Governor of the Australian Central Bank, Reserve Bank of Australia, Philip Lowe becomes the first major developed economy central banker to lose his job for falling behind the curve in intervening to pre-empt the steep rise in inflation.
Lowe has suffered a strong public backlash since the RBA started an interest rate tightening cycle last year, belying his previous guidance that rates were set to stay low. The bank’s main policy rate has been raised a dozen times, from 0.1 per cent to 4.1 per cent, over the past 15 months and the bank has indicated more increases might be needed. The decision by the Australian Treasury to switch the head of the central bank during a rate-tightening cycle is set to attract wider scrutiny around the world, as governments launch inquests into whether central bankers were too slow to react to the threat of inflation.
The biggest culprit may be Ben Bernanke who initiated quantitative easing at an unprecedented scale in the aftermath of the Global Financial Crisis. In fact, it's probable that history will judge the central bank balance sheet expansion as one of the biggest mistakes of the century. It's time governments and public opinion hold technocrats to account for their failures.
6. More signals of hardening European attitudes towards China.
Germany’s first ever China strategy reflects how the world has changed. China is its largest trading partner, and a crucial market for its industrial powerhouses. Yet Berlin flagged that it had decided to “de-risk” its ties, ignoring a warning by Qin Gang, China’s foreign minister, that de-risking could mean “de-opportunity, de-co-operation, destabilising and de-development”. At the same time in Britain, a scathing parliamentary report found that London’s response to China’s “increasingly sophisticated” spying operations have been “completely inadequate”. It added that the UK was “singularly failing to deploy a ‘whole-of-government’ approach” to the problem of China. Berlin’s adoption of a comprehensive policy shows the importance it now attaches to diversifying its supply chains and export markets away from the country, so reducing its exposure to external shocks. Its strategy aims to identify vulnerabilities, make German companies more aware of the risks of doing business in China, and make clear Berlin will not bail them out if they get into trouble.
7. The US Federal Trade Commission (FTC) and its Chair Lina Khan suffered a major setback when a federal judge in California rejected the FTC's request to block Microsoft's $75 billion acquisition of Activision Blizzard. The Judge ruled that the FTC had failed to prove that the mega merger would harm competition in the video game industry, especially in terms of whether Microsoft would limit its rival Sony's access to blockbuster Activision game Call of Duty.
The FTC had argued that Microsoft had significant incentives to make Call of Duty (a franchise with more than $30 bn in lifetime revenue) exclusive to Xbox and withhold it from Sony's PlayStation or degrading PlayStation versions of the game, so as to boost sales of Xbox. Microsoft countered that it had signed deals with companies like Nintendo to offer Call of Duty on other platforms and had offered Sony a deal as well, and would lose significant revenue by cutting off PlayStation gamers.
8. Labour costs is an area where India remains competitive
But the low wages may also conceal poor quality, thereby making quality adjusted labour costs being much higher.
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