On the same day his former chief of staff was giving evidence to MPs about the vetting of Lord Peter Mandelson, amid a continuing row over his appointment to the Washington ambassadorship, UK Prime Minister Keir Starmer was leading a meeting of a special cabinet committee.
While all the attention was on Morgan McSweeney’s dramatic appearance before the foreign affairs committee, the Prime Minister was discussing events of far greater importance and more significant impact.
The Mandelson affair is rebounding on him. It was very much Mr Starmer’s decision to approve sending Lord Mandelson to the US capital, knowing his past history of involvement in scandal and controversy.
It is convenient to forget temporarily – given the focus in the UK media at least, on the Mandelson fallout, which has undoubtedly wounded Mr Starmer’s reign – that world events are continuing apace.
There is a war on, and the economic harm to the UK could be profound. Which is why Mr Starmer is holding meetings of an emergency cabinet body set up to look at any shortfalls. It’s receiving briefings from a group of ministers meeting twice weekly to assess food and fuel stock levels, and possible disruptions to supplies caused by the crisis.
Bottlenecks abound
The war pitting the US and Israel against Iran might seem distant, but the UK is bound to feel the effects. The International Monetary Fund is predicting that of the world’s advanced economies, it will suffer the most from the global energy shock. The IMF has cut its growth forecast for the UK this year from 1.3 per cent to 0.8 per cent.
Mr Starmer’s officials have drawn up a "worst-case scenario" of possible food shortages by the summer, should the war have not ended. Darren Jones, chief secretary to the Prime Minister, and his officials are repeatedly "war-gaming", with researchers told to dust off the files from the 1970s and see what happened then, in previous oil jolts. "The work is frantic," said one source. He described the atmosphere as "intense and ferocious. They’re avoiding panicking but the gravity of the situation for the UK is left in no doubt".
“Our best guess is eight-plus months from the point of resolution that you’ll see economic impacts coming through the system,” he added.
As Mr Jones and his team examine the knock-on consequences for “the UK in a lot of detail”, he has played down the likelihood of gaping holes on supermarket shelves or flight cancellations.
The high-level Middle East response committee on Tuesday considered plans to protect British people from the impacts of the war in Iran. "That means making targeted interventions that will not have a lasting impact on interest rates, which led to mortgage rates shooting up for millions across the country," a statement said.
Hard landing
Like other world leaders, Mr Starmer is having to manage events that are not of his own making. But as the IMF estimate highlights, the UK is in a weaker position than its peers.
None of which is Mr Starmer’s fault, despite at times hysterical efforts by the opposition and sectional media to lay the blame at his door. He did not seek this war; he has not played a role in exacerbating or prolonging it. Indeed, US President Donald Trump has made plain his disdain for what he perceives to be the UK’s inaction.
Spikeflation
Yet Mr Starmer is having to pick up the pieces and the harm may be huge. One analyst, Trevor Greetham, head of multi-asset at Royal London Asset Management, describes it thus: “History doesn’t repeat itself, but often it rhymes. Financial markets are once again contending with a 1970s-style Middle East energy crisis that has the power to raise inflation, worsen fiscal sustainability and push the world into recession.
“Deglobalisation, underinvestment, political instability and populism have made developed economies vulnerable to price-level shocks that central banks are unable or unwilling to reverse.”
We are heading for what Mr Greetham terms "spikeflation", and the UK is going to feel the pain more than many others.
He is bases his analysis on the fact we’ve been here before. There is a sense of this being the 1970s revisited. Then, there were two inflation surges. The first, due to the 1973 Arab-Israeli War and oil embargo cutting off the flow of crude oil from the Gulf. In the US, inflation rose to 13 per cent. That was bad enough, but in the UK, it reached 27 per cent.
Second was the Iranian revolution, which again sent the UK reeling.
Unfortunately, the UK is just as exposed as previously. Nothing, or rather too little, has changed.
What is provoking alarm is the possibility that this time round the world inflation shock may be even more pronounced. That may have deeper repercussions for the UK, and that is not the fault of Mr Starmer. He is the one charged, for now at any rate, with managing a way through.
Why more severe than in the recent past? Because the world has sleepwalked its way into potential catastrophe.
The response to the pandemic saw governments set out to preserve consumer incomes and corporate cash flow. Too much cash was injected into the system to stimulate demand. The result was that too much money was chasing too few goods, and inflation over the past few years has set in, becoming the norm. Insufficient effort has been made to battle it, so with this new energy shock, the world is already starting from an inflated base.
Likewise, there has been chronic underinvestment in commodity supplies around the planet – one exception being China, certainly where rare earth minerals are concerned.
The great fuel push has been to switch from fossil fuels to renewables to fight climate change, but this is nowhere near replacing the reliance on oil and gas. With their interruption the world has woken up to just how dependent it remains. Major investment is required to repair the damage to existing refineries and infrastructure, let alone increase production in the future.
The world, too, is deglobalising. Having gone through a period of globalisation, decoupling is accelerating, with countries concentrating on looking after their own and putting domestic needs first. The shift began with Covid-19, when nations were forced to draw in on themselves and accept higher costs. The tariffs war, again prompted by Mr Trump, has only accelerated the trend.
Advancing technology and calls for less migration, certainly in the US and Europe, are affecting the labour market. Jobs are harder to come by.
Some countries are experiencing lurches in political control, as populism, fed by social media, has taken hold. This has seen beleaguered administrations launch policies in a bid to fend off rival surges, rather than make themselves additionally unpopular by, say, curbing inflation. They’ve chosen to go in the opposite direction, paying little heed to fiscal rules, borrowing and spending their way out of trouble.
It’s not only moving away from fossil fuels towards renewables – in several instances, they have moved away from defence, reducing expenditure in the belief it was no longer a priority. In Europe, Russia’s invasion of Ukraine, and now the Iran war, have forced a rethink.
None of this is unique to the UK. But where the UK is especially fragile is that each of these factors has borne down to an even greater degree.
Strident, costly attempts were made in the UK to prop up industries in the pandemic. Arguably, they were overgenerous, with initiatives launched in haste, regardless of the total bill and the longer economic ramifications.
For decades, the UK has been on an energy roller-coaster, with a series of lurches and switchbacks. The North Sea is to be fully exploited, then it’s not; the emphasis is on renewables, promoting the country as a European and world force, then progress is slowed; now, the clamour is back to extracting what is left in the North Sea. The result is an economy that cannot fulfil its own requirements, now or ahead, and a yawning gap that only continues to be highlighted by Iran and the closure of Hormuz.
Brexit left the UK having to fend for itself and it has not been able to counter the loss of the collective umbrella and customs bloc of the EU with free trade agreements of its own. Then, to worsen matters, along came Mr Trump’s tariffs onslaught.
In spite of leaving the EU, previous UK regimes were unable or unwilling to secure its borders, giving rise to populist protest. At the same time, businesses complain that they cannot access the skilled labour they once did.
Faced with increased costs in other areas, notably health and welfare, earlier UK governments chose to slim down military investment. Today, after Ukraine and Mr Trump’s insistence that Nato raises its game on defence, and now with Iran, the pressure to increase security has intensified.
Not a single factor is down to Mr Starmer. They are due to successive prime ministers (and they arrived and went with alarming alacrity) failing to get a grip, not addressing underlying problems and pandering to short-term, votes-grabbing instincts. Mr Starmer is bereft, charged with trying to turn around a supertanker that is stuck.
Issues instant
He could not be reasonably expected to resolve these issues in an instant. It is true that he has not aided his cause – the most common charge against his government from business is that nothing gets done, that simply achieving the slightest step forward takes an age.
That said, there is no doubt Mr Starmer was dealt a weak hand. He could have been more skilled in how he played it, but the cards were, and are, stacked against him. Somehow, he has to deliver a winning position. It is not going to be easy.
