When we think about America’s economic resilience, most of the credit goes to Silicon Valley and Joe Biden’s big spending.
Students of Franklin D. Roosevelt and World War II will know that it was not just the New Deal that pulled the United States out of the Great Depression, but military spending.
There are echoes today of the Wall Street Journal claiming that the war in Europe (now we might add the Middle East) is boosting American manufacturing.
Industrial production in the US defense industry is increasing 17.5 percent since Russia launched its war against Ukraine two years ago.
The State Department reports £63.5bn in arms deals in the nine months to September 2023 – £40bn from Europe.
In demand: Ukrainian soldiers load ammunition into a military vehicle. Industrial production in the US defense industry has increased 17.5% since Russia launched its war against Ukraine two years ago.
Britain, through aerospace and defense champion BAE Systems, is among the beneficiaries of this trend.
Social, environmental and governance (ESG) objections among investors to the UK’s vibrant military industry are rapidly fading.
BAE’s 2023 results, showing a 14 percent increase in earnings per share, reflect this trend. Free cash flow of £2.6bn at a company that has historically struggled to stay in the black, is up from £2bn last year.
Orders, just under £70bn, are £11bn more than a year ago.
There is more to come. The current conflict in the Middle East will have improved the prospects of Saudi Arabia purchasing the next generation Eurofighter, the Tempest.
As things stand, BAE has reached an agreement with Riyadh to support the existing Salam Typhoon project for a further five years. Nearby Qatar has received ten more typhoons.
BAE boss Charles Woodburn warns that profit increases in 2024 will be in the single digits, between 6 and 8 per cent.
There are bound to be concerns about indigestion and quality control with such a large order book and the disappointing performance of the UK’s two new airlines may be a symptom of this.
The British company outperforms its continental rivals thanks to the trust it enjoys in the United States, where it recently won a ten-year contract for a munitions plant.
It also provides vital components for the fuselage of the US flagship F-35 fighter.
Stakeholders have reason to be relieved that a proposed merger with Airbus in 2012 failed. Unfortunately, other UK defense companies such as Cobham, Inmarsat, Meggitt and Ultra Electronics were acquired at prices that must now be considered bargain-basement.
Command and control has passed into foreign hands: blunders by the government and the city that should never be repeated.
Fragile finances
The government’s borrowing and debt figures, a fortnight ahead of the March 6 budget, were sure to generate excitement.
This is especially true given that the £16.7 billion surplus is more than double the £7.4 billion in January 2023.
There has therefore been much debate about room for maneuver – room to cut taxes – despite the Chancellor’s efforts to curb speculation.
Jeremy Hunt did the same with the Autumn Statement and delivered £21bn in tax breaks, but the great hope among Conservative voters – a reduction or abolition of inheritance tax – turned out to be a trial balloon.
Three aspects of the latest data are worth noting. Firstly, January is almost always when the Government has a surplus because that is when self-assessment returns are submitted.
Secondly, borrowing costs fell from the £7.1 billion forecast by the Office for Budget Responsibility to £4.4 billion as inflation fell.
The bottom line is that buoyant tax revenues may have begun to moderate. Lower inflation leads to lower and lower interest rates, but means that freezing tax relief, income, capital gains and inheritance levies does not generate a revenue bonanza previously estimated at around £40bn. year.
What reduced inflation offers, it also takes away.
Bonus Bonanza
Among the people benefiting from inflation and peak interest rates are HSBC bankers.
It was a bumper year, despite the Chinese write-downs, which saw chief executive Noel Quinn’s salary almost double to £10.6m. The nearly £3bn bonus was the highest in a decade.
By contrast, payments to senior bankers in Asia, other than HSBC, fell below $1m (£793,000). HSBC’s largesse is difficult to justify amid uncertainty over growth and asset prices in the Hong Kong and Chinese markets.
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