Fatally Flawed

Make UK, the manufacturing lobby group has warned that Sir Keir Starmer’s vaunted industrial strategy ‘will be fatally flawed unless sky-high energy costs are tackled.’ 

Just as a reminder, the government’s industrial strategy is to prioritise eight ‘growth’ sectors: advanced manufacturing, clean energy, creative industries, defence, digital and technologies, financial services, life sciences and professional and business services.

The Spending Review set aside £22.6bn for research and development funding, including £2bn into the government’s AI Action Plan, nothing was agreed regarding energy costs.        

Ministers are reported to acknowledge that high energy costs, which manufacturers claim are 46% higher than the global average, must be addressed in the strategy. Ministers are thought to be looking to increase the ‘British Industry Supercharger’ scheme, set up by the previous government in April 2024 which cut bills for 370 of the most-energy intensive industries such as steel and ceramics. However, UK business groups want the support to be more widely distributed across sectors, including the removal of levies such as the ‘renewables obligation’ and ‘climate change levy’ from bills.

Meanwhile, in the US, while Trump is seeking to exploit its oil and gas reserves to enhance energy security, more of the US tech giants are turning to nuclear energy. For example, Meta has recently announced a 20-year agreement with the largest US nuclear operator. The deal is said to be cheaper than a similar one negotiated by Microsoft last year to provide power to its datacentres. Both deals are a reminder of the massive amounts of energy that will be required as AI develops but also the lengths to which these US tech-behemoths will go to maintain their green credentials as fossil fuels would be cheaper.

If businesses in the UK are to thrive, particularly manufacturing, then competitive energy and energy security are vital. The government’s commitment to Sizewell C and Rolls Royce modular nuclear reactors is encouraging but the energy generation from these is a long way off.

What have we been watching?

Another week and more twists and turns for global investors! There was good news, with soft US inflation raising investor expectations of more interest rate cuts from the Federal Reserve (Fed) while Trump raised hopes of a trade deal with China. However, these positives were countered by military engagement between Israel and Iran which saw oil prices push higher.

On the trade front, Trump posted ‘OUR DEAL WITH CHINA IS DONE, SUBJECT TO FINAL APPROVAL WITH PRESIDENT XI AND ME’ and that the deal would see Beijing supplying rare earth minerals ‘UP FRONT,’ with the US in turn meeting its commitments, including on Chinese students using US universities. Trump also talked of 55% tariffs against China which implies that the current combination of tariffs would continue. This presumably is the 10% baseline tariff, 20% fentanyl tariff and the 25% tariff imposed in 2018-2019). American media also reported that China was putting a six-month limit on new rare-earth export licences in exchange for the US agreeing to relax its recent restrictions on the sale of jet engines and ethane to China. If the two largest economies in the world can finalise a trade agreement this would be very positive. However, the West is likely to remain vulnerable to China’s carefully developed stranglehold on rare earth minerals and their processing which besides being key for many renewable technologies are crucial to the US defence industry.

In other trade news, with less than a month to the end of the 90-day extension to the reciprocal tariffs on 9th July, Trump said that the US would be sending out letters over the next week or so, telling the various countries what the deal is. However, the EU ‘will be probably the very, very end’ of the trade deals which the US completes.

Media reports suggesting that Israel is preparing to launch an operation into Iran proved true. Israel undertook a number of strikes against Iranian nuclear and military facilities, as well as killing the head of Iran’s Revolutionary Guards. The weekend saw both sides launch further strikes.

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Donald Trump called for a deal like that between India and Pakistan, which had quickly ended the recent hostilities in Kashmir. He also noted that the US could be drawn into the conflict and that the Iranians should under no circumstances attack any US assets. Brent crude oil surged to $75 on the developments. Elsewhere the initial weakness in financial markets has so far proven short lived, with the expectation that the conflict will be contained.

 

In the UK, the government announced the Spending Review. Chancellor Rachel Reeves unveiled ‘Labour choices’ for public spending for the next three or four years, with the focus on health and education and a £113bn debt-funded capital spending programme. Markets have already shifted focus to the Autumn Budget and the fact that the risk of yet another fiscal hole of between £10bn-£15bn is possible due to a range of factors including Trump tariffs on global economic growth. Further tax increases appear inevitable! Within 24-hours of announcing the Spending Review the ‘chickens were coming home to roost’ from Rachel Reeve’s earlier Budget. She was ‘disappointed’ as the UK economy contracted by 0.3% in April.

 

In the US, inflation data for May was softer than expected, with CPI up just +0.08% from April, making it the fourth downside surprise in-a-row and raised hopes that the Fed will cut interest rates. Investors were reassured by the lack of tariff impact on inflation. However, there were some initial signs of inflationary tariff pressures within the figures from those sectors reliant on China manufacturing. For example, toys posted the biggest jump in four-years of 1.35% while major appliances saw the biggest jump in five-years at 4.3%.  In addition, markets will be keeping a close eye on Middle East developments given the increase in the oil price and the potential impact of higher energy prices on inflation.

Finally, the recent row between Trump and Elon Musk has created uncertainty over NASA’s budget. Forty science missions are reported to be in line to be cancelled as Trump wants NASA to focus on landing astronauts on the Moon before the Chinese and to have American astronauts plant the ‘stars and stripes’ on Mars. Space science and exploration requires long-term planning and co-operation between government, companies and academic institutions so the astonishing exchanges, snap decisions and U-turns cannot be helpful!

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