Economic and business planning these days is a bit like trying to play chess on the deck of a yacht in a storm. It appears inevitable that the introduction of new and arbitrary trade tariffs, cancelling major trade agreements, and restricting strategic exports will reduce international trade. Nevertheless, this is the approach of the new US administration who also appear to be abandoning long established defence and security agreements, and stopping US support for Ukraine’s courageous resistance to Russian aggression. Reacting to this, European leaders, notably, France's President Macron and the UK’s Prime Minister Starmer are already demonstrating their independence. Their ranks have also just been swelled by the new German Chancellor-in-waiting, Friedrich Merz, who has signalled his ambition for a stronger Germany and a stronger Europe.

How will these seismic changes affect the UK and Europe as a whole? A reality check is that the combined GDP of some 42 democratic European states, with a population of around 550m people exceeds that of the United States, and is on a par with China. Properly organised and led, democratic Europe is potentially a major world power. To achieve this, which now seems an overdue priority, Europe urgently needs to spend more on defence to strengthen and integrate its armed forces. This will also raise the enormous issue of how command, control and decision-making will work independently of the US.

To pay for increased defence and compete effectively in the emerging new world, Europe will need to take steps to improve its economic performance. Clearly, extra defence spending will be good for defence companies. There is also much else that could be done to achieve US-level economies of scale throughout the continent. Some new opportunities may emerge for Europe: Peace in Gaza and Ukraine would bring reconstruction and wider business opportunities. Europe is continuing to recognise the climate emergency and the need to transition to renewable energy. Funding this will be painful, but it will be good for industrial activity and energy independence, as well as helping to slow the impact of climate warming. New opportunities may also arise as Europe separates from the US. Closer trade relations with China are a possibility as well as an increased diversity of international banking and payment systems which the UK is well equipped to lead. Hopefully, the democratic states of Europe will start to cooperate together more energetically to increase the competitiveness of their technology sectors in order to create competitors to the dominant US companies.

For the UK specifically, as the Labour government has recognised, there is no alternative to the hard and initially thankless job of pulling the economy out of the ditch and getting it working efficiently towards the goal of sustainable growth. Defence spending is probably too urgent to wait for the return of growth, so it is welcome that the UK and Europe are already looking at ways to boost the cash available. Possibly, some efforts could also be made to increase funding for the energy transition which promises a lot in terms of future savings but is difficult to fund fully from consumer revenue. If existing organisations, such as the World Bank, do not step up to this challenge, perhaps some new mechanisms could be considered?

Individual companies operating in the UK face different prospects in the coming year according to their size and sector: In general, increased employment taxes will bear down hard on sectors such as retail, hospitality and care. Larger companies should benefit from clear UK government policies and a stable administration but cannot be immune from external shocks. Release of phase 2 of the government’s three-year spending review, and the strategic defence review, both due in the next few months, should bring some greater clarity on government spending plans. We also hope that better trade relations with the EU will be agreed and will help reduce some of the economic damage caused by Brexit.

At the Industry Forum, we look forward to continuing discussion of the many issues facing policy-makers and business executives. We are tolerant of all views but confident that effective and trusting dialogue will produce better solutions than chain saws. All comments are welcome to info@industry-forum.org

A Strange New World for Business