2021: Not great but could have been worse

As 2021 draws to a close, it has felt in many ways like a year in the holding pen as we wait for the pandemic to blow itself out. In the western world we have learned to cope with Covid to some degree and even though life is not back to normal the shock value which accompanied the onset of the disease in early-2020 has been conspicuous by its absence. Unlike 2020 when our year-ahead predictions were blown out of the water, an assessment of the predictions made at the start of the year indicates that GDP growth projections broadly met expectations and equity markets continued to power ahead. It was also the first year in four in which we were spared the spectacle of Donald Trump in the White House, thus taking some heat out of global politics. Not everything went according to plan, of course. One thing that was unforeseen was the huge surge in inflation which necessitated the Bank of England doing the unthinkable by raising interest rates.

Another year dominated by Covid

At the end of 2020 things looked grim on the Covid front. A year ago the world had registered 82 million cases and 1.9 million deaths. They got a lot worse in 2021: There are now 287 million registered cases and 5.4 million deaths. These are clearly an underestimate. Europe and North America together account for more than 50% of all cases and deaths, despite accounting for just 15% of the global population. This is largely attributable to better data recording and testing procedures in the developed world as countries with better developed health systems produce more accurate (or more properly, less inaccurate) data. It is also the result of the wilful underreporting of Chinese figures. According to the WHO, China has recorded just 131,315 cases and 5,699 deaths, of which just 1,045 have occurred since May 2020. The epidemiological profession relies heavily on accurate data to model the incidence of disease and project its progress. Fictional data from the region where the disease was first recorded does nothing to help the rest of the world cope with the pandemic.

One of  the great successes in 2021 was the rollout of the vaccine programme. I must confess in autumn 2020 to being somewhat sceptical that governments would be able to roll out the vaccine as quickly as they promised and that it would take until the second half 2021 before needles would start going into arms in a big way. As of today almost half of the world’s population has been fully vaccinated (two shots) with 23% of Europeans and 20% of Americans having received a third booster dose. The vaccine rollout across the EU started more slowly than perhaps it should have but by end-2021 the proportion of those fully vaccinated has caught up with the UK, whose government trumpeted the speedy rollout of its vaccine programme as one of the benefits of leaving the EU (spoiler alert: it wasn’t).

Economy on track but inflation is not

Largely as a consequence of the vaccine rollout, which reduced the extent to which governments were required to lock down their economies, the global economy has rebounded sharply and appears to have suffered considerably less scarring than I anticipated a year ago. After contracting by 3.1% last year, global GDP is estimated to have grown by 5.9% this year and is projected to grow by 4.9% in 2022. Although global GDP is back above 2019 levels, output in the industrialised world is not quite there yet (although US GDP has been above pre-Covid levels since Q2 2021). Nonetheless, compared to expectations in mid-2020, the recovery has been stronger than anticipated and owes much to the actions of governments and central banks in providing fiscal and monetary support.

One of the unexpected consequences of the post-2020 shock has been the huge surge in global inflation. There were suggestions in the early stages of the pandemic that the hit to the supply side of the economy was such that demand would recover more quickly than supply and that there would be a hit to inflation in the medium term. But this was not the consensus view (nor mine). As recently as April the IMF was reporting that inflation would “remain contained in most countries” and projected US inflation in 2021 at 2.3%: over the first 11 months it has averaged 4.5%, reaching a 39-year high of 6.8% in November. The reawakening of the inflationary threat will prove to be one of the major challenges facing monetary policymakers in 2022. I maintain the view expressed in mid-year that the inflation threat will fade but also maintain the view that higher inflation justifies the “case for taking away some of the extreme monetary easing put in place over the last year” – and the Bank of England has duly obliged, unexpectedly raising Bank Rate by 15bps to 0.25% earlier this month. The Fed is likely to follow suit in 2022.

Markets also performed in line with expectations

As predicted, global equities remain the asset class of choice – there really are few places to invest in this low returns environment that will generate the kind of boost that equities are able to give. The S&P500 surged by 27% in 2021 compared with 15% for the FTSE100 and 16% for the DAX. I suspect further upside is likely in 2022 although not at anything like this pace. Bond yields did edge up a little in 2021 in contrast to expectations, with the US 10-year yield up 59 bps on the year, but given the unanticipated surge in inflation that is not such a bad result.

Brexit not yet done

According to Boris Johnson, Brexit was “done” at the end of 2020 when the UK left the protection of the transition arrangements. But as I have long pointed out, Brexit is a process not a one-off event, and it is not going well. I will come back to this issue in 2022 but suffice to say the economic costs are making their presence felt. UK trade flows remain well below their pre-Covid levels whereas German trade has recovered back above these levels. Meanwhile, the OBR calculates that Brexit will cost 4% of output in the long-run versus a 2% hit due to the pandemic. The resignation of Lord Frost as the UK’s Chief Negotiator of Task Force Europe earlier this month, partly over the handling of Brexit, suggests that the process is not delivering what its most vigorous proponents expected. Nor are voters enamoured of the process with a mounting proportion increasingly viewing the vote as a mistake (chart).

Don’t forget environmental issues

For a brief period last month, environmental issues were all over the news as the climate disaster slowly makes its way up the agenda. But governments have not (yet) stepped up to the challenge. The real action on reducing carbon emissions has to come from China and India, with Asia accounting for over 90% of CO₂ emissions since 1990, but neither of them has a plan in place which will limit the rise in global temperatures over the next decade. Those who have watched the film Don’t Look Up, the current big hit on Netflix, will recognise the unwillingness of governments to deal with issues which clash with their electoral priorities. It is not just Asia which has to do more to deal with climate issues: Europe and the US will also need to act, largely because they are in a better financial position to do so. Perhaps what 2021 demonstrated (yet again) is that whilst we all like the idea of saving the planet, we are unwilling to pay the price – both financially and in terms of lifestyle change – to make it happen.

It has not been a great year by any means, but if you are reading this, at least you got through. A Happy New Year to you all and here is wishing a healthy, happy and prosperous 2022

Tree options

After yet another disrupted year with Covid on the rampage once again many people are determined to celebrate this Christmas in a bid to inject some normality into their lives, if only for a few days. And who can blame them? Spare a thought for the hospitality sector, however, which depends heavily on the Christmas party season to generate a large proportion of its annual takings but which has suffered a rash of cancelled bookings and a general collapse in activity. Spare a thought, too, for those working over a period when most people are taking a well-earned break, notably those in the medical profession.

The history of the Christmas tree

One of the most common sights at Christmas are decorated trees which brighten up the gloom at a time of year when most European cities struggle to get more than 8 hours of daylight per day, with Stockholm and Reykjavik managing just 6 and 4 hours respectively. Although decorated trees today symbolise Christmas, they in fact predate Christianity. In Ancient Rome, trees were decorated with small pieces of metal during Saturnalia, the winter festival honouring Saturn, who among other things was the god of agriculture. It has been speculated that the early Christian church adopted 25 December as the celebration of Christ’s birthday in order to tie it to a festival that was already known and accepted by wider society.

Whatever the ancient origins, the concept of an evergreen tree symbolising life in the middle of winter became a well-established European tradition in the centuries that followed, with the modern idea of a Christmas tree originating in the Alsace region on the Franco-German border in the sixteenth century. Tinsel with which to decorate trees was invented in Germany in 1610 (although France became the world’s leading producer by the start of twentieth century). Trees started to catch on in the English-speaking world following the publication in 1846 of a picture in the Illustrated London News showing Queen Victoria, her German husband Prince Albert and their children around a Christmas Tree. In 1850, Charles Dickens’ short story A Christmas Tree described it as “that pretty German toy.” At a time when the UK has a rather convoluted relationship with the EU, it is ironic that many of the trappings of a traditional English/American Christmas in fact originate from Germany. The Germans were ahead of the game once more with the invention of the artificial tree in the 1880s in order to alleviate pressure on natural resources.

Demand has since continued to grow and no self-respecting European or North American head of state’s residence would be seen without a sumptuously decorated Christmas tree. In the United States alone, around 35 million natural trees are now sold each year; the corresponding figure for Europe is around 50 million of which the UK accounts for 8 million. Statistics suggest that two-thirds of UK households opt for an artificial tree with roughly 40% of US households doing the same.

The economics are interesting too

The economics of tree production are particularly fascinating. It takes between six and ten years to produce a natural tree around 6 feet (180cm) tall, so the tree standing in your living room today was probably planted no later than 2015. Producers therefore have to gauge the market up to ten years in advance and also cope with climatic effects which can have a significant impact on the crop. 

In terms of market trends, one of the big issues that tree farmers face is to judge the balance of demand between real and artificial trees. A decade ago artificial trees made up just 10% of the number of trees sold annually in the US – that share has since quadrupled – although in fact the number of live trees sold has remained static whilst the growth in the overall market has been driven by a surge in artificial tree sales. Another factor to look out for are changes in demand for particular variants of tree. In the 1990s, UK demand for Nordmann firs suddenly surged due to the fact that this particular variant is less prone to shedding its needles than the previously dominant Norway spruce. This was a particular problem for growers who were banking on the market remaining unchanged on a six-year horizon. However, those who spent weeks and months after Christmas looking out for pine needles trodden into the carpet now give silent thanks for the introduction of the Nordmann.

As with any agricultural product, unexpected climatic and meteorological events are the things that all growers must beware. Farmers in Oregon, the main production centre in the US, suffered a heatwave this summer which killed off a lot of seedlings in the early stages of development. Fortunately this has not done too much damage to the tree market this year since demand was met from inventory, but a shortfall could occur in 8-10 years’ time if farmers cannot make up for the hit to 2021 production levels. The result has been a modest rise in Christmas tree inflation, according to industry sources, adding to the upward pressure on prices which saw US CPI inflation hit 6.8% last month. Artificial tree producers have also had their problems this year. The bulk of production takes place in China and the rise in global transport costs in the wake of the pandemic has produced a rise of around 25% in US artificial tree prices. Chris Butler, CEO of National Tree Company, reported that “last year we paid $2,000 to $3,000 for containers and this year we’re paying in the region of $20,000.”

Of course, the big question is whether you should go natural and buy a single-use tree or invest in a multi-use artificial variant. Purists argue that there is nothing to beat the smell of fresh pine in the living room although the fact that large numbers opt for the artificial option suggests that for many the downside of jamming the vacuum cleaner with fallen needles outweighs the benefits. The huge piles of discarded trees littering collection points in early January would appear on the surface to suggest that natural trees are very environmentally inefficient. But the balance is a lot more tricky to determine.

According to the Carbon Trust, a 6 foot artificial tree is responsible for about 40kg of greenhouse gas emissions, suggesting that it has to be used anywhere between 7 and 20 times (depending on the weight and the materials in the tree) in order to match the carbon footprint of a natural tree. There again if you are sourcing your natural tree from a long distance away, the carbon footprint of the transport costs will quickly mount up. However, if ownership of a real tree is too much responsibility, you can always rent one for the Christmas period which will then be returned and replanted. Whether this is ecologically sound is a moot point but at least you can feel smug about not contributing to the huge piles of discarded trees that build up at the start of the year.

Whatever kind of tree you choose – or even if you choose not to display a tree at all – it only remains for me to wish a safe and Merry Christmas to you and yours.

Start listening

Two years ago Boris Johnson won a thumping majority at a general election which produced the Conservatives’ best result since 1987. It has since been anything but plain sailing. Whilst Covid has changed both the political and economic landscape, the government has made a series of unforced errors which has called its authority into question. Effective leadership in the UK has been conspicuous by its absence of late and the issues are now beginning to cut through with the electorate. The Conservatives’ heavy defeat at the North Shropshire by-election, which until this week had returned a Tory MP to Westminster at every plebiscite since 1832, is an indication that all is not well.

It is ironic that the by-election did not need to happen at all – it was only triggered by the resignation of Owen Paterson who, if he had accepted the 30-day suspension imposed by the parliamentary Standards Committee, would still be an MP. The fact that the government tried to bend the rules to keep Paterson in place has opened up a whole can of worms, with last month’s corruption stories being supplanted by a media furore over parties in Downing Street last Christmas in breach of the social distancing regulations in place at the time. This comes on the back of the Dominic Cummings affair, when one of the PM’s senior advisers was able to flout lockdown rules. It is not just the actions of politicians which are causing the public to be restive. The police refusal to investigate the issues are straining the electorate’s credulity and patience, especially when people faced criminal charges for holding gatherings at the same time as the Downing Street event took place (this video sums up the popular view).

A government in trouble but let's not get carried away

Although the double-digit vaccine-driven Tory lead in the opinion polls at mid-year had narrowed somewhat, even in early-October they enjoyed a comfortable six point lead. This has evaporated very quickly with Labour now enjoying a six point lead. Although we should be wary of reading too much into mid-term opinion polls – all governments experience a sharp drop in support at some point – the speed of the collapse has set alarm bells ringing in government. So long as Johnson was perceived to be a political asset, his party was willing to turn a blind eye to his shortcomings. But Johnson’s public approval ratings are flagging. If press reports are to be believed, dissatisfaction with Johnson’s style of leadership is mounting in Westminster and challengers are jockeying for position in the event that a leadership contest is called in 2022. But don’t hold your breath.

For all the excitable commentary suggesting that the prime minister is in big trouble we should not allow ourselves to get too carried away. For one thing, experience suggests that prime ministers can hang on for quite some time after MPs begin to question their leadership. This was true for Theresa May and perhaps even more so for Margaret Thatcher, whose authority leached away over a prolonged period. This is perhaps even more relevant to today’s situation since she, like Johnson, was the personification of the government. My guess is that Johnson is unlikely is to be going anywhere anytime soon. A second problem is that the Tories do not have anyone with the star quality to fill Johnson’s shoes, despite the claims being made for the Chancellor Rishi Sunak. In addition, there is also a risk that the electorate may start to weary of a party that has developed an unfortunate habit of ditching its leaders – both of his predecessors either jumped or were pushed – particularly one with Johnson’s brand recognition.

Is Johnson a cause or a symptom?

In any case, there is an argument that Johnson is merely a symptom, rather than the cause, of the political malaise. Perhaps it is his party rather than just the prime minister which is increasingly out of tune with the electorate. As former Conservative minister Chris Patten recently suggested in a radio interview, “I’m not sure that this is a Conservative government. I think this is a sort of all over the place, rather chaotic English nationalist government.”

Having recently reread John Major’s autobiography I was struck by many of the parallels between the situation facing the current Conservative government and the travails of Major’s government between 1992 and 1997. Back in the 1990s, Major was undermined at almost every turn by a determined coterie of Eurosceptics which gave rise to a situation in which, to use the words of former Chancellor Norman Lamont, “we give the impression of being in office but not in power.” Although dissident Conservative MPs believed they were tapping into the well of public opinion, in reality their  obsession with anti-EU ideology was out of proportion to its importance to the general public and they paid the price at the ballot box in 1997.

The situation today is not quite the same. After all, in the last five years the Eurosceptics appear to have won their “war” with the EU but only at great cost to the institutional fabric. But they seem unable to accept the economic consequences of their actions and continue to lash out at the EU rather than coming to an accommodation as the public appears to want. The government often seems helpless in the face of Covid. Large numbers of MPs increasingly have a problem with lockdown measures to try and halt the spread of the disease, citing the primacy of personal freedom over the strictures of what one MP called the “public health socialist state.” Indeed, in a parliamentary vote earlier this week, 99 Conservative MPs voted against legislation making it a requirement to wear masks in indoor venues and it was only passed thanks to the support of the opposition. This flies in the face of evidence suggesting that the public is in favour of measures to combat the spread of the Omicron variant.

At a time when most people are trying to get on with their lives in the face of Covid, they do not have time to care about political machinations. But when they are regularly assailed with stories of failure to apply the rules consistently, they start to become restive. One of the principles of a modern democracy is that no one is above the law. Everyone has to abide by the same rules and the sheer volume of evidence to the contrary was one of the reasons for the North Shropshire result.

It may be that this is merely a short-term issue that will eventually blow over. Perhaps if the pandemic recedes in 2022 much of the anger felt today will dissipate. This makes it even more important that the government properly handles the latest wave of the pandemic. Tory MPs may object to a lockdown but public opinion suggests that there is not the same degree of opposition. As it is, large parts of the hospitality sector are already complaining that pre-Christmas trade has collapsed. The government may be forced to resurrect the furlough scheme in some form in order to provide a backstop for those whose incomes are being hit. Without some form of financial support, the Red Wall seats which the Conservatives won in 2019 may revert back to Labour. Either way, it is time for the government to start listening to those in whose name they govern, for the public do not like what they are currently seeing and hearing.