A Tale of Two Oils: The Reversed Fortunes of Refineries and Tankers

Shore Oluborode

Introduction

There has been much ado made about the winners and losers of the global COVID-19 pandemic and the subsequent lockdowns. Cluttering the pages of the Financial Times and The Economist, have been tales of rising stars in the technology space such as Tesla Inc., who not only enjoyed a 650% increase in their stock price but also for the first time in its 19 year history turned a profit, who were lauded for their ingenuity and tenacity to weather the economic turbulence. Concurrently, others who were not so fortunate like Chinese property developer Evergrande (which saw its share value fall by 95%) were pitied for their financial imprudence and misfortune. Many would have also believed that the energy sector had garnered a similar sort of attention, especially considering the current role energy prices play in the record rate of inflation that we, globally, are facing. However, I contend that we, in our obsession with the outlandish, have ignored nuanced developments elsewhere along the energy supply chain, in particular, the oil refinery and oil tanker industries.

Ailing Refinery Industry

An oil refinery is an industrial plant that transforms or refines crude oil into usable products such as gasoline, diesel, and jet fuel. Like many others before, the year 2019 was a lacklustre year for the industry. The international benchmark Brent Crude Oil prices hovered around $64 a barrel throughout the year, remaining suppressed due to heightened US production for domestic consumption and significant Chinese economic slowdown leaving an excess of oil in the market languishing in refinery storage facilities across Singapore, Saudi Arabia, and Russia. So, when international lockdowns struck in early 2020, the refineries were not in the healthiest of positions to handle such a shock.

Over the course of nine months, beginning with one of the sharpest drops in global stock market history, the refinery industry faced a totalising exogenous demand shock in the form of international travel bans, curtailed social events and diminished road traffic.

This shock, oppressed demand with reductions of over 9%, tailing that trend, production experienced a 6.6% contraction, further glutting the oil markets, causing oil prices to fall as low as $9 a barrel but averaging $42 a barrel (a fall of over 34%) for the year. Market contractions are not good, but as the previous graph shows, refineries reduced production to nearly match demand, so why were oil prices so low and how is this different from other business cycle downturns?

Recall that by the end of 2019, storage facilities were already brimming with oil. So, despite production and consumption tracking one another there was an out-sized amount of oil sloshing around global markets intensifying the price plunge. This caused significant revenue reductions, for global and national refineries, and the lowest profit margins, industry-wide, in 20 years.

Another point to note: refining millions of barrels of oil a day can be an expensive enterprise, worsened still by the fact that a large portion of these costs are upfront capital expenditures. Such is the case that unless refineries are operating at minimum, 80% production capacity, it is simply unaffordable to operate them and most owners in that situation either convert the refinery into a storage facility or exit the market entirely, and that is exactly what happened. Of the top ten oil refining countries, who represent 62% of global production, three have closed a portion of their refining capability indefinitely with a further 9 countries, not in the top ten, permanently shutting down greater than 15% of their production capacity.

Invigorated Tanker Market

A product (or clean) oil tanker is a ship designed for the bulk transportation of oil products, from refinery stations to consumers. Similar to the refinery industry, the product oil tankers were not in great form in 2019. With lowered levels of international consumption, demand for transportation of oil products was found lacking in the form of reduced volume transportation. This only sustained the financial under-performance of clean tankers, in comparison to other sections of the energy sector, that has been characteristic of the industry since 2015.

What came as a surprise, however, was the reversal of fate for industry players in 2020. One would have envisioned that with halted demand for oil product transport, reflected in the respective fall of 11.3% and 8.3% in world imports and exports of oil products in 2020, that product tankers would have had to endure deepened financial difficulty, but that was not the case.

As the above graph shows, on the five major clean tanker routes transport prices were essentially unchanged or even increased with the Middle East to the Far East route displaying rises of 14.5%. So, how did this come about?

Contangos, or the situation where current (or spot) oil prices are lower than predicted future oil prices, are the main culprit for the improved favour that clean tankers basked in. With the cascading crude oil -and hence product oil- prices, traders in the industry anticipated that future prices would be higher. Additionally, onshore storage facilities at/near refineries, at the time, were already scarce. Armed with this knowledge, traders furiously began to charter product tankers as floating storage spaces; for as long as the cost of storing the oil was not greater than the expected margin between spot and future prices, these traders were content to just wait for prices to increase.

The use of product tankers as temporary storage facilities is not a new phenomenon and also prominently featured during the recession of the late 2000s. What makes this instance unique is how long it was sustained. For months, as opposed to a few weeks, product tankers, especially those who transported oil along the routes with less traffic, just had their tankers soaking up revenue which had doubled in a week. Consequently, the fall in tanker supply meant that whatever product oil was transported could be serviced by a shrinking pool of tankers, shoring up spot rates for tankers.

Important Implications

The reverberations of this fascinating dynamic that occurred in 2020 will be felt for years to come, in forms I’m sure we have yet to fully comprehend. Nevertheless, I will attempt to detail two such consequences of that strange period on our current day.

The limited refinery production capacity coupled with the increased cost to transporting oil has caused frictions in the current provision of oil products through a self-sustaining price inflation spiral. When demand for oil products returned to pre-pandemic levels in 2021, as production was slow to catch up, the price of oil shot up, increasing demand for (and price of) gas, a close substitute. As gas is also an input to the production for product oils, this only further delayed oil production sending both the price of oil and gas ever-higher fuelling food price inflation and threatening energy poverty across the globe.

An unanticipated result of this development is Russia has been able to secure considerable financing of its war against Ukraine through the sale of oil and gas to at first Europe, but now, India and China as the price of oil and gas remains elevated.

On a more positive note, the energy insecurity has brought the green energy transition to the forefront of policy discussions. Not because relying more on renewable sources of energy is better for the environment, but because it contributes to energy independence and reduces geopolitical risk. If nations are able, through the production of sustainable domestic energy, to temper their reliance on foreign sources of energy they’re better able to not just prevent dizzying energy price inflation but also confront belligerent governments in a robust manner.

Conclusion

The addition of the COVID-19 pandemic to the growing list of Black Swan events, whilst spurring on the decline of the oil refinery industry and gifting product oil traders the opportunity to buy a barrel of oil (containing 158 litres) for the price of a Boojum burrito, is something to remember, I think a lot of good will ultimately come from it.

Although currently, we are suffering under serious economic and business environment instability, the pandemic and I am not sure we have overcome much of the chaos that has come from its immediate consequences, the opportunity for the long term re-orientation of our economic and commercial practices to be more aligned with our vision of what the world should be like is a reason to be optimistic.

Rising energy costs: a time for change?

Cian Hennigan

This month, the CEO of US energy company Chevron, Mike Wirth, came out with a robust statement against the current pivot in energy production away from fossil fuels to renewable energy. He exclaimed that “The reality is, [fossil fuel] is what runs the world today. It’s going to run the world tomorrow and five years from now, 10 years from now, 20 years from now”. This view has been publicly shared by Jamie Dimon, CEO of JP Morgan Chase. He recently stated in a Congress testimony that his bank would not be uninvesting in fossil fuel companies, as doing so would be a “road to hell for America”. These views are motivated by the desire to increase fossil fuel supply to alleviate price pressures created by the current energy crisis. However, they are in conflict with the longer term climate issues facing energy companies. The traditional energy sector requires intricate investment and reform to change their business models from non-renewable to renewable, which places a major amount of responsibility on lending institutions to invest in a sustainable way. Governments are currently investing in renewable energy at an increased rate, in the hope of reaching climate goals set by international pacts such as the Paris Agreement. Although government investment is secure, the energy crisis provides the first significant test of the banking industry’s commitment to Environment, Social and Governance (ESG) practices. Early investment in renewable energy will likely lead to significant future profits for lenders due to the finite nature of our current energy system, and will help to alleviate some of their reputational downfalls in the last 15 years. Despite this, short-term deviance to fossil fuel investment is lucrative for banks and their shareholders if prices remain elevated. This dynamic will greatly impact the rate at which our societies can rely completely on renewable energy.

The current geopolitical tensions have come at a fragile time for a transitioning energy sector. The evaporation of Russian gas supplies to the European market has severely reduced energy supply. This has put direct upwards pressure on prices, fuelling the cost of living crisis. Over the past year, energy prices in the Euro Area have been the main driver of the increase in the Harmonized Index of Consumer Prices (HICP), which is the main measure of inflation for the Euro Area. The annual HICP specifically related to energy prices was measured at 38.3% in September, with overall inflation measured at just over 10%. Governments have directly responded to the increase in prices, such as Germany introducing a €200 billion energy aid programme which will place a cap on gas and electricity prices. An EU wide energy aid programme is currently being considered by the EU.

It is likely that energy costs will remain elevated into the future, with many warnings of a worse crisis in the winter of 2023. European natural gas storage is likely to be completely depleted by next spring, and the current uptake in Liquefied Natural Gas is not forecasted to be able to fully replace the loss in energy supply from Russian gas. Firms and households will have to prepare to reduce energy consumption by a considerable amount, which will have a severe impact on industrial production and growth in Europe. A rapid development in Europe’s renewable energy sources is key to reducing exposure to spikes in fossil fuel prices according to IMF researchers. This development will require a significant amount of investment, both from public and private sources. It is not understood what the investment balance will look like in an energy sector dominated by renewable sources, but it is intuitively likely that both will be important in financing the transition.

From a public angle, investment commitment is quite clear. National governments will look to make it convenient for energy companies to build renewable infrastructure such as wind turbines and solar panels. These policies will come in the form of both direct investment and polices that make it more financially lucrative for renewable energy infrastructure to be built. The switch away from fossil fuels will also allow governments to reduce their expenditure on energy caps on fossil fuels if geopolitical tensions persist and prices remain elevated. If fossil fuel prices begin to fall, it is necessary that governments continue to use carbon taxes to promote the continued transition to renewables. The REPowerEU initiative by the Commission also provides a much needed commitment of funds from the EU, along with an overarching strategy for the European response to a changing energy market.

The finance sector has begun to understand their ESG responsibility in recent years, with an industry led alliance called The Glasgow Finance Alliance to Net Zero (GFANZ) being created last year. This alliance looks to improve ESG standards and practices within the finance industry. GFANZ have also decided to collaborate with the UN under their Race to Zero agenda, to align GFANZ to the climate goals of the UN. There has been a strong uptake by banks to join GFANZ, and as a member they must set intermediate ESG targets and annually report on their progress to net-zero. These commitments include the clause that all operational and investment portfolios must be net zero by 2050. The energy crisis is the first real test of these commitments, and how seriously banks are taking sustainability. Various ‘greenwashing’ scandals have thwarted the impact of ESG efforts and shown the importance of the clear messaging surrounding sustainability practices. 

As part of the alliance, banks have agreed to help clients in carbon intensive sectors transition to a more sustainable business model. Oil and gas companies fall under this umbrella but have been earning windfall profits due to increased energy prices. The upsurge in profits has led to a 15% increase in lending to fossil fuel companies in the first nine months of the year, according to Bloomberg. There has also been some push back by GFANZ members against the implementation of legally binding ESG agreements, initially suggested by the UN. GFANZ stated that all members can follow their own governance structures, essentially ruling out this possibility. GFANZ is co-chaired by former Governor of the Bank of England, Mark Carney. According to Carney, the transition to renewable energy is a complex task that requires bold action by governments and financial institutions. He has expressed that “to limit warming to 1.5°C, projected clean energy investment must run at four times the rate of fossil fuel investment by the end of this decade. That will require a tripling of the current pace of clean energy investment”. Understanding the sluggish movement so far in the financial industry shows the glaring reality that banks will always act in a way that sustains profitability and satisfies shareholders. GFANZ is a fledging alliance, and the current crisis is the first major test of its stability and purpose.

In the short term, banks may use the excuse of protecting consumer prices to continue profitable investments in fossil fuel companies. That being said, it seems like an extremely risky long-term strategy for any financial institution to go against the macro trend of renewable energy investment. Transitioning energy companies is a suitable role for banks, but the finance industry has struggled in the past with understanding it’s responsibility to stakeholders other than their shareholders. The underlying uncertainty will yield tentative action by many banks until their peers proceed, but those who wait too long may diminish future earnings. The future of energy production lies in renewables, but the timeline and journey to that point is unclear. How quickly we move as a society will be directly related to the decision making of those with lending capabilities.

Ethical marketing: does it exist?

Yvette Dempsey

The discipline of marketing is one which has received criticism over the years for its ethical standards, which are often called into question in discussions regarding hyper-consumption, climate change, mental health and the promotion of ‘sin’ products. The question posed seeks to clarify whether or not an avenue for ethical marketing exists. It is my argument that ethical marketing does exist. It is the supplementary question that leads to debate. Is ethical marketing profitable, effective and feasible without greater socio-economic change?

In this essay I will focus on the example of the fashion industry to illustrate thoroughly how marketing and its ethics are contingent on the product it endeavours to promote, and how the discipline has become a scapegoat for greater industrial problems.

There is a plethora of evidence to support the claim that ethical marketing exists. Forbes have released numerous articles warning companies off unethical practices which encourage misleading advertising, inciting controversy, emotional exploitation and flooding customers’ inboxes with spam advertisements. There is an emphasis not only on the benefits of ethical marketing for the greater good but also the positive impacts companies may yield from taking ethical factors into consideration, such as increasing customer loyalty. Empathy, sustainability, promise keeping, honesty and transparency have been cited as the five major components in ethical marketing philosophy by online marketing resource Wisepops. Forrester has also devised the ethical marketing mix, which cites product responsibility, price transparency, promoting with honesty and deploying fair product placement as the four pillars of ethical marketing.

In conjunction with academic literature supporting the claim that ethical marketing exists, it is also visible in several successful campaigns which have deployed ethical marketing to yield great results. For example, Aoife Ireland is owned and run by fashion designer-turned- entrepreneur, Aoife McNamara. Based in Limerick, the company offers transparent insight into the production process on its website. There, customers will learn that raw materials are locally sourced and limited to wool from local wool mills powered by hydro-electric energy, mostly recycled cotton and recycled polyester. Products are made in Ireland and shipped in 100% recyclable packaging, right down to the recycled paper tape.

Internationally, brands such as Stella McCartney offer the same resources, informing customers that products are made from biodegradable stretched denim or bio-acetate frames used in eyewear products, for example. Companies such as Patagonia, Levi’s and Toms have also joined the ranks in publishing the details of their production processes and Corporate Social Responsibility schemes.

If the discipline of ethical marketing is as developed and sophisticated as is evidenced, then why beg the question of its existence at all? Well, when one considers the abovementioned ethically-marketed campaigns, there is a common thread that binds these companies together.

The products are ethically made. The companies declare an ethical ethos. The raw materials are ethically and locally sourced. It is the simple transparency used by marketers to reveal an ethical company and an ethical product that renders the marketing ethical and successful in and of itself.

Comparatively, where traditionally unethical companies, such as Shein, attempt to market themselves as sustainable or ethical against objectively damming evidence, they are rightfully criticised. This has become so common a practice by companies who recognise the demand for ethical production among Gen Z in particular, that the term ‘Greenwashing’ has emerged, acting as an, albeit transparent, veneer for inherently unethical products. Where Greenwashing occurs, a company presents itself as sustainably ethical, promoting an exaggeration of the companies’ efforts to combat climate change. An example of this can be seen in Shein’s recent appointment of an Environmental, Social and Governance (ESG) Officer to its board. This appointment has been criticised as nothing more than a publicity stunt, as the business model operated by Shein is dependent on labour exploitation and sourcing cheap, synthetic materials in order to produce nearly 1000 new products every day. Shein is not the only company guilty of greenwashing, as H&M’s Looop Campaign encouraging customers to recycle their clothes in store has been criticised for doing little to distract from the 3 billion garments produced by H&M every year.

The question is, is it really possible for companies such as H&M and Shein to maintain their reputations of producing low cost garments at tremendous paces, while also being ethical and sustainable? This model of production is one that has been enjoyed by producers and consumers alike since the early 2000s, leading to the likes of H&M and Zara becoming industry leaders. The demand for ethical production is a relatively novel concept, causing companies to scramble to their marketing teams in the hope they may be able to wrap a shiny recyclable bow around a €10 top made in a sweatshop on the other side of the planet.

Where the literature exists and exemplifies practices such as transparency regarding raw materials, supply chains and ethical employment standards, the truth is that many of these companies would not be able to withstand interrogations into their practices. Conversely, were a startup providing sustainably made garments to match the low prices proposed by fast fashion companies, they would be unlikely to yield any profit whatsoever. Higher quality garments made sustainably and ethically yield higher cost prices, meaning it is relatively impossible for these companies to compete against the likes of Zara or Shein. This is especially true in the instance of targeting Gen-Z and Millennials, whose financial capacities often favor the side of fast fashion.

Marketing techniques availed of by fast fashion industries are inherently unethical in the way that they prey on consumer’s insecurities and the human desire for belongingness. For example, influencer culture may have been intended to transition from the supermodel era to promote a more “relatable” role model, however, it is a rather rotten feeling when you realise that you are still stylistically poles apart from the people you are supposed to relate to. This disparity is enjoyed by fast fashion industry leaders acting as the knight in shining armour, churning out instruments of climate destruction in the form of oversized blazers and mom jeans at affordable prices, only to commission influencers to change their style recommendations the following week; kickstarting the same damaging cycle in order to maintain steady profit.

It is a cultural change that is needed for ethical marketing to truly thrive. A culture of value, whereby consumers are encouraged to invest in pieces which will enjoy longer life spans. A culture that offers scope for new and emerging ethical marketing practices, such as promoting a culture of repairing, reselling, upcycling products and spending more money on clothes in order to discard the long held, harmful attitude that outfit repeating is the biggest sin of all.

This attitude threatens the core of many fast fashion companies, whose high turnovers are contingent on a fast-paced trend cycle and keeping input expenses low. It is beyond the scope of the marketing department to salvage these companies’ reputations and place them in a realm in which they simply do not belong. Unethical production and its marketing are outdated and survive only on the equally outdated attitude that accompanies hyper consumption and a capitalist mentality.

While this should be interpreted as a threat to companies operating unethically, it should pose as an opportunity for industry newcomers to reinvent the wheel. There are endless ways in which marketers can enjoy the successes of ethical marketing, where there is attitudinal reform and scope for a new wave of entrepreneurship and innovation.

I would, therefore, conclude that unethical marketing is simply a symptom of an unethical socio-economic philosophy that has emerged and survived under capitalism. While emerging startups are ingratiating sustainability into the very core and ethos of their companies, as demonstrated by Aoife Ireland, the long-standing industry leaders can only dress a mutton up as lamb to salvage future profits from their historically loyal customers.
A culture whereby consumers invest in sustainably made products and keep them for an extended product life span is truly incompatible with the production techniques currently deployed by industry leaders. The consequent, unethical marketing techniques such as influencer culture and propagating fast changing trends at low prices is incompatible with standards upheld by ethical marketing literature and philosophy. I have used the example of the fashion industry throughout this discussion as I feel it is effectively illustrative and relevant, however, the same discussion can be applied to industries such as technology, aviation, travel and car manufacturing, to name but a few.

Ethical marketing exists. Unethical marketing also exists. But marketing overall, as the face of business, has been used as a scapegoat to draw the line between ethical and unethical production practices. It is the choice of emerging marketers to place themselves on the right side of history and render the very premise of the posed question- does ethical marketing exist? -ludicrous. It may be a challenge. It may be unchartered territory. But it may be just what our planet needs to clear our seas, to clear our skies and to clear marketing’s name.

The Micro and Macro Costs of Inflation: 2022 Edition

India Riordan

The volatility, reduction in real wage and lower living standards caused by inflation are often noted as core costs. These effects are aggravated by the methods used to combat the phenomenon, for monetary policy tightening conventionally causes decreased demand, a reduction in investment, and as a result, lower GDP. However, while the US has been in a technical recession for over a month now, and the UK is likely to join, labour market tightness in both economies illustrates that central banks’ actions to combat current inflation has yet to make households feel recessionary pressure. However, this mis-match between supply and demand for labour makes a wage-price spiral more likely, risking inflation becoming permanent and expectations de-anchoring into the future. While data illustrates this de-anchoring has occurred at a low level, a recent quote from a Sky News interview that “there’s no light at the end of the tunnel, it’s just going up” encompasses households’ price expectations. This, alongside recent IMF reports that next year will feel more like a recession, suggests even in this current crisis, the pain will not be avoided, merely delayed. This is hugely negative for many households who, for most of 2022, have already been struggling.

Households have been changing their consumer habits, from cooking at home instead of eating out, to cooking in air fryers/slow cookers rather than in ovens. Additionally, food choices have shifted, as illustrated by the decline in Beyond Meat’s share price by nearly 68% since early August, as ‘flexitarian’ households return to the cheaper option of eating meat. The inflationary impact on other micro-habits is not so clear, with the Fed finding the work from home (WFH) trend contributed to the current inflation, and others arguing the trend could ease inflationary pressures on households thanks to childcare and transport savings. However, a large contributing factor to current inflation is the energy crisis, hence there is an argument that the WFH trend may turn-around, as people begin going to the office to save money on electricity and heating. While these changed habits illustrate inflation’s pervasiveness, with all households affected, they represent a microcosm for more serious micro-impacts. In June, Asda’s Income Tracker revealed 20% of households in the UK had negative discretionary income, hence their income no longer covered essential spending. Since UK inflation has risen further, hitting 10.1% in September, this figure could only have increased.

From a socio-economic standpoint, this heat-versus-eat dilemma faced by households is arguably the most damaging micro cost of inflation. Furthermore, while wages could rise eventually in-line with inflation, pensions and savings cannot. This suggests pensioners and the elderly are disproportionately hurt by inflation, something that is likely to be seen over the coming months. Thus, the socio-economic effect, particularly on society’s most vulnerable individuals, is large. Furthermore, increased financial stress risks impacting mental health, while the lack of ability to heat homes, and potential for blackouts across Ireland and the UK, means physical health is also likely to falter. Given that the NHS is prepared to be under increased pressure all winter, and the HSE is increasing recruitment, this micro cost of inflation is clear.

The pervasiveness of inflation impacts all generations, including future ones. As households prioritise where to spend their reduced real income, moral and ethical spending considerations are likely to be replaced by the requirement to survive. A recent survey illustrated that 59% of CEOs believe ESG considerations will take a backseat due to inflation and impending recession, encompassing the impact on firms too. Furthermore, with a core cause of 2022’s inflation being rooted in energy, other less environmentally-friendly energy sources are being sought. Indeed, the EU has been increasing coal production amidst a global rush for the commodity, alongside other more heavily polluting fuels. This shows that as we prioritise the present, future generations are likely to experience an indirect knock-on effect of these inflationary pressures.

It is worth taking a deeper dive into the costs for firms, who usually benefit from a low, steady inflation rate. However, the aforementioned labour market tightness, coupled with the rising costs of keeping stores, industrial units and restaurants/pubs open due to high energy bills, illustrates that the root causes of this high, volatile inflation, alongside the uncertainty that accompanies the phenomenon, negatively impacts businesses. Small-medium enterprises (SMEs) who may struggle to cushion cost increases, alongside businesses with lower margins, are likely to be particularly hurt. Therefore, business owners must be flexible in evaluating their entire value chains, while heightening employee productivity and considering new approaches to everyday tasks. While this shake-up could be positive for business-owners in the long run, and some argue that creative destruction leaves immediate pain, but long-term gain, there are questions over the extent to which business-owners can ride-through this current period through merely adapting, or whether more government support is needed, particularly for SMEs, to survive.

This shake-up extends globally, and here-in lies the macro costs of inflation. While many micro costs stem from inflation itself, the macro-impacts are also rooted in the response to the phenomenon – namely in the effects on output of monetary policy tightening. This trade-off between inflation-targeting and a reduction in economic growth can lead to a difficult dilemma, seen recently in the UK, between fiscal and monetary policy. Where monetary policy should be independent from politics, political myopia and a requirement to heed manifesto pledges means that the two can, in periods of (particularly supply-side) inflation, work against one-another. The macro-effects of this trade-off regarding financial stability and further recessionary fears are clear, with Moody’s recent de-rating of the UK’s financial outlook to ‘negative’ and the volatility of the pound encompassing this. However, whether this is causal, or rather, driven by the political instability of a nation that will have three prime ministers within two months, illustrates the political effect of inflation. While political myopia, and a need to impress the electorate often drive political behaviour, lessons from the 1970s of valuing central bank independence, and using fiscal policy to support both monetary policy, and those who will be hurt by the tightening is crucial.

Despite the macro-environment differing slightly from the 1970s, the root causes of this inflation, namely loose monetary policy (quantitative easing) during Covid-19, alongside the supply-side shocks in energy, is similar, suggesting policy lessons can be sought from this parallel. Volcker’s famous re-anchoring of inflation expectations, gained through strong communication, transparency, and hard-line monetary policy tightening, encompasses this. Where the US struggled in the 1970s, other economies, namely Germany, performed better. This is likely due to Germany’s focus on monetary targeting, alongside German fears post hyper-inflation, ensuring that a low, stable inflationary environment, alongside well-anchored inflation expectations, were not taken for granted. The stability of inflation expectations has been well documented over the last decade and during the Great Moderation, meaning policy-makers’ stances towards these expectations may have relaxed. Hence, when various data-points, including US TIPs vs 5 year Treasury bonds (began deviating in Feb. 2020), Bank of England inflation attitudes survey (by June 2021), and the ECB’s Professional Forecasters’ Survey (by Q1 2021), began to suggest inflation expectations were de-anchoring, multiple Central Bankers continued to argue that inflation was transitory. Therefore, monetary policy may have to shift to re-anchor these expectations, with potential concerns for the impact on future monetary policy. Is the success of inflation-targeting compromised when fiscal and financial conditions are weak? Will trust in Central Banks decline in the long-term, suggesting a need for changed policies/targets? Will the independence of Central Banks be threatened? These, alongside many more questions, arise from inflation, suggesting shake-up is not only required on a micro- level, but also on a macro, institutional level.

Furthermore, this extends to global institutions. Lael Brainard recently called for a more global approach to central banking, while noting the Fed’s attentiveness to Emerging Markets’ (EMEs) financial vulnerabilities. Up to October 2022, investors withdrew a record $70 billion from EME bond funds. These investments are crucial for EMEs’ economic development, and symbolise the impact of inflation in a globalised world. This is something not experienced before, with the Governor of the Central Bank of India recently noting “the world is in the eye of a new storm.” Therefore, these spillover effects of inflation in a globalised world illustrate a macro cost of the phenomenon on global economic development.

Thus, this encompasses the pervasiveness of inflation. From changing households’ habits, to the requirement for firms’ flexibility, alongside a need to evaluate fiscal and monetary policy on a local and global scale, it is evident that high, volatile inflation can be destructive. Ultimately, while lessons from the 1970s could be utilised by policy-makers, increased globalisation, the tightness of an un-unionised labour market, and the dollar’s strength, means this is a different and difficult inflationary situation. Therefore, uncertainty becomes a barrier to the successful and swift mitigation of inflation, as well as driving the micro and macro costs of the phenomenon.

Liz Truss: The Great Resignation and its Impact on UK Policy & Economy

Following the resignation of Boris Johnson, Liz Truss distinguished her leadership campaign by her commitment to deliver “growth, growth, growth”. In reflection, Truss’s brief stint in office was disastrous for the British economy. 

Truss’ ‘growth plan’ included cancelling a planned increase to corporation tax, reversing a rise in National Insurance Contributions, cutting the basic rate of income tax and abolishing the higher rate completely. Truss’ policies culminated in an unfunded £45 billion tax cut in her Chancellor of the Exchequer, Kwasi Kwarteng’s mini-budget.

Truss’ rationale seemed to invoke a renaissance of neo-liberal economic policies to fight inflation and stimulate economic growth. Previously supported by Ronald Reagan and Margaret Thatcher, neo-liberal economics purports minimal state intervention, deregulation and confidence in free markets. These austerity-driven financial policies favour the wealthy, and were unsurprisingly met with enormous public backlash in the UK against the current macroeconomic backdrop. In the midst of a cost of living crisis, stagnant growth and an energy crisis, Truss’ plans for the economy were seen as unorthodox by some and frankly naïve and reckless by many.  Upon the news of Kwarteng’s mini-budget, the pound dropped to the lowest level ever against the dollar, UK government bonds saw a heavy sell-off and the FTSE ended the day deep in the red. The Bank of England’s decision to intervene and purchase £65 billion of long-dated gilt was the calamitous culmination to a string of bad days for the British economy.

The backlash culminated in Truss sacking Kwarteng, only to step down herself 6 days later. Truss’ 44 day stint in office makes her the shortest-serving British prime minister in modern history. 

Her resignation has shaken the economy of Britain as it faces a worsened cost of living crisis as well as a looming recession. The election of the more economically moderate Rishi Sunak to No.10 has had somewhat of a calming effect on the economy with the pound stabilising. 

Sunak has outlined that difficult decisions lie ahead as he intends to cut spending. Jeremy Hunt, Chancellor of the Exchequer, warns that the new budget being prepared, is ‘going to be tough”.  

After weeks of financial turmoil, expectations for a recession have intensified and forecasts for its extent deepened.  While the appointment of Sunak has eased economic uncertainty and tensions in the bond market, the country still faces a profound economic challenge with a fourth-quarter GDP decline of 1.6%, predicted by Goldman Sachs’ economists. 

To curb inflation, it is expected that the Bank of England will increase monetary contractions by hiking interest rates 75 basis points in November and December. This will hopefully cool the economy enough to calm inflation and panic.

Truss’ brief stint as PM shows that neoliberal economic policies remain unpopular.  They are particularly unwelcome in economically challenging times and can even be term-ending for its proponents in power. With Sunak we can expect less turbulence but the outlook is still negative for the British economy as businesses and citizens alike brace themselves for tightening monetary policy.

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