TheChek News Flow

The Bank of England can learn from history

By the time the Bank of England’s quantitative tightening programme is completed, quantitative easing will have cost British taxpayers £100bn, according to the latest forecasts from the Office for Budget Responsibility.

That is a dreadfully large amount of money. The final figure won’t be known until the vehicle in which the assets bought in the programme — the Bank of England Asset Purchase Facility Fund (APF) — is wound up many years from now, but it’s hard to see how it won’t be big and negative. It will be a constant drag upon the UK’s economy.

But, like it or not, the losses are there and have got to be paid. Perhaps the most important thing, right now, is to try to understand how we got here. It’s a sound principle of public finance that somebody identifiable should be responsible when debts are incurred. In this case, accountability for the losses is obscure.

In launching quantitative easing, the powers that be (or, rather, were), took a risk. Initially, QE provided a positive tailwind to the public finances; now, it is backfiring. 

So the fundamental question is one of risk management — whose responsibility was it?

In an August 2016 letter from then-Governor Mark Carney to then-Chancellor Philip Hammond, the former said that role lay with the Bank, which “[a]lthough indemnified . . . risk manages the APF on behalf of HMT”.

So, on paper, it was Threadneedle Street’s job. But this framing never made real sense. Whatever Carney said, the Treasury’s indemnity is, and was, the practical expression of the Treasury’s acceptance of responsibility for the risks.

The nature of the risks depends on the nature of the assets. The Bank of England Governor and executive managers decided early on that the APF would confine its purchases as far as possible to gilts, and the Treasury did not demur. The decision implied a lot of interest rate risk. For the Bank, it was a matter of doctrine, not financial risk management. The Monetary Policy Committee was allowed no say in the matter. 

For its part, the MPC ignores profit and loss in its deliberations, seemingly also as a matter of principle. Here’s deputy governor Sir Dave Ramsden discussing its approach last year:

This is a bad principle, and a bad approach. The losses from QE cannot be seen as separate from monetary policy: they are so large as to significantly increase the risk of the public finances becoming unsustainable and of fiscal dominance of monetary policy. That would undermine the MPC’s objective, and the MPC should be concerned about it.

But this is all theoretical — what about the actual monitoring of risk? Initially, senior bank staff apparently didn’t understand the interest rate risk, or even realise that there was any risk, based on the findings of the House of Commons Treasury select committee’s January report on quantitative tightening.

Much lower down the hierarchy, risks were carefully quantified and reported throughout — but nobody did anything about them. Perhaps this was understandable in the early days, when QE was an emergency measure, but — as it metamorphosed into the main instrument of monetary policy — a reassessment was badly needed.

Was it essential that QE be carried out exactly as it was? Was there no other, less financially-risky policy that could have achieved the same macroeconomic result?

Actually, maybe there was. Purchases of privately-issued assets (or loans against such assets) might have achieved the same result — or probably better, because they would have made it easier for banks to meet new regulatory liquidity requirements, and thus to extend more credit after the crisis. And they would almost certainly have been much less costly.

Unfortunately, once QE as we know it was in train, none of the people who really mattered — Treasury officials and the executive managers of the Bank — seem to have thought very hard about the alternatives. The doctrine of concentrating on gilts prevailed without much recorded debate or explanation. 

If you can’t see where responsibility lies, then the management structure isn’t working — and needs to be redesigned. The Treasury obviously needs to pay closer attention to the risks against which it has issued indemnities. Yes, it should not have taken the temporary cash flow surplus from the APF and frittered it away — thanks, George Osborne — but, moreover, in over-respecting the Bank of England’s independence it surrendered its own objectives for debt management.

The Bank, meanwhile, needs to stop ignoring the side-effects of its decisions. A good start would be to consolidate its decision-making committees into a single executive board, which in setting policy would consider its effect on all of the Bank’s objectives. And the Bank should get closer to the Debt Management Office.

To be fair, the Bank has evidently recognised that there are problems with its structure, and has, for example, revised the ‘concordat’ that prevented the MPC from expressing a view about what assets the Bank should buy in QE. But even if it wanted to, the Bank couldn’t make the necessary comprehensive reform without new legislation. The QE episode shows how expensive malfunctioning structures can be.

This is not a proposal to weaken the independence of the Bank of England or modify its objectives. Its purpose is to recognise the fact that actions taken in pursuit of one objective can prejudice other objectives. Refusal to face that fact is the real threat to the Bank’s independence.

Sous l’effet du ralentissement de la croissance et de la baisse des recettes fiscales, le déficit public, annoncé mardi par l’Insee, a largement dépassé les prévisions du gouvernement en 2023.

Rarement quelques dixièmes de point auront-ils été autant attendus, scrutés et commentés. Le déficit public pour 2023 s’est finalement élevé à 5,5 % selon les données publiées mardi 26 mars par l’Insee, chargée en France de le mesurer. Soit 0,6 point de plus que les 4,9 % prévus par Bercy.

Le gouvernement avait préparé les esprits à une mauvaise nouvelle depuis plusieurs semaines. Dans un entretien au Monde le 6 mars, le ministre de l’économie, Bruno Le Maire, affirmait qu’« en raison de la perte de recettes fiscales en 2023 », le chiffre serait « significativement au-delà des 4,9 % ». Un effet du ralentissement de la croissance qui a poussé Bercy à revoir ses prévisions macroéconomiques pour 2024 à la mi-février, et à annoncer un nouveau train d’économies budgétaires de 10 milliards d’euros pour l’Etat avec effet immédiat. Prévue à 1,4 % dans la loi de finances pour 2024, la croissance du PIB est désormais attendue à 1 % cette année – ce que nombre d’économistes jugent encore trop optimiste.

L’impact du ralentissement sur les finances publiques est presque mécanique : les budgétaires estiment qu’un point de croissance en moins par rapport aux prévisions plombe le déficit de 0,5 point de PIB, le taux de prélèvements obligatoires étant, en France, proche de 50 % de la richesse produite (le point de PIB équivaut quant à lui à un peu plus de 25 milliards d’euros). Plus le déficit 2023 se creuse, plus l’objectif que le gouvernement s’est fixé pour 2024 devient difficile à atteindre : pour l’heure, Bercy table toujours sur un solde public ramené à 4,4 % cette année.

Des trajectoires jamais respectées

Le rythme du redressement des comptes publics demeure plus lent en France qu’ailleurs en Europe. Paris devrait actualiser ses chiffres à l’occasion du programme de stabilité, un document transmis chaque année à Bruxelles en avril, qui détaille comment la France compte ramener son déficit sous les 3 % du PIB en 2027. L’exercice a perdu de sa pertinence au fil du temps, les trajectoires n’étant jamais respectées, et ne sera plus obligatoire à partir de 2025 en vertu de la réforme des règles européennes. La Cour des comptes n’en évalue pas moins dans son dernier rapport annuel à 50 milliards les économies que le gouvernement doit dégager pour revenir sous les 3 % en 2027.

La succession de mauvaises surprises budgétaires alimente depuis plusieurs semaines les critiques des oppositions, sans que celles-ci ne formulent réellement de propositions de réduction des dépenses. Depuis que Bruno Le Maire a corrigé ses chiffres le 18 février et annoncé 10 milliards d’euros d’économies moins de deux mois après l’adoption du budget, la droite comme la gauche lui reprochent d’avoir tardé à faire toute la lumière sur la situation des comptes publics en dépit de signaux convergents.

Le rapporteur de la commission des finances du Sénat, Jean-François Husson, élu LR, s’est ainsi invité à Bercy jeudi 21 mars en vertu des pouvoirs dont il dispose pour obtenir des chiffres, dénonçant la « rétention d’informations » du gouvernement, qui disposait selon lui déjà d’une note en décembre évaluant le déficit de 2023 à 5,2 % du PIB, en plein examen du projet de loi de finances au Parlement.

« Vous nous présentez un plan de réduction de 10 milliards d’euros des dépenses publiques, parce que vous vous êtes complètement plantés dans vos prévisions de croissance », avait raillé le député LFI David Guiraud le 6 mars face aux deux ministres de Bercy auditionnés par la commission des finances de l’Assemblée. « Alors qu’aucun organisme n’avait estimé crédible votre prévision de croissance du PIB de 1,4 % en septembre 2023, vous venez de revoir votre prévision à 1 % », avait pointé de son côté le député Libertés, indépendants, outre-mer et territoires Charles de Courson. Le gouvernement s’est toujours défendu d’avoir cherché à dissimuler la vérité des chiffres, et se retranche derrière les organisations internationales, comme le FMI, l’OCDE ou encore la commission européenne, dont les prévisions étaient relativement proches des siennes à l’automne, quoique toutes inférieures.

L’ampleur de la correction à mener a toutefois fait l’objet de débats au sein du gouvernement. Bruno Le Maire était favorable à l’option d’un budget rectificatif dès le début d’année – un geste censé permettre d’aller plus loin que les 10 milliards d’économies réalisées par décret, et donc plafonnés par les textes. Mais la voie d’un budget rectificatif a été jugée trop lourde et périlleuse politiquement, surtout à quelques mois des élections européennes. Même si les annulations de crédit ont suscité beaucoup d’émotion dans les ministères concernés, dont certains en ont appelé à l’arbitrage de Matignon, le décret avait de fait l’avantage de la rapidité.

Trouver de nouveaux gisements d’économies

La question d’un nouveau texte budgétaire reste ouverte pour la suite de l’exercice 2024. L’aggravation du déficit 2023 risque de contraindre Bercy à trouver de nouveaux gisements d’économies – ou de moindres dépenses – dès cette année, surtout si les recettes fiscales ne se redressent pas. Le chef de l’Etat souhaite à tout prix éviter de passer par le Parlement compte tenu de la configuration politique. Le projet de loi de règlement, qui solde chaque année l’exécution budgétaire de la précédente et doit arriver en mai dans l’Hémicycle, inquiète déjà dans la majorité, alors même que le texte ne présente aucun enjeu politique.

En attendant, Bruno Le Maire, le ministre délégué aux comptes publics Thomas Cazenave, la ministre du travail Catherine Vautrin et le ministre délégué à la santé Frédéric Valletoux réunissent ce jeudi les responsables de la majorité en séminaire pour évoquer les pistes de baisses de dépenses, l’hypothèse de hausses d’impôts étant pour l’instant écartée par l’exécutif malgré des pressions croissantes dans la majorité. L’Etat ayant déjà été largement mis à contribution, Emmanuel Macron entend mettre à contribution la sphère sociale, qui représente la moitié des dépenses publiques, ainsi les collectivités locales, dont les dépenses ont augmenté plus vite que l’inflation.

« Il faut voir la magnitude, la raison de ce dérapage et voir derrière d’où il vient et donc qui y contribue », a indiqué le chef de l’Etat à l’issue d’un sommet européen à Bruxelles vendredi 22 mars. « La dépense publique n’est pas faite que de la dépense d’Etat », a-t-il ajouté, visant sans les nommer les collectivités locales et les dépenses sociales. L’exécutif ne fait pas mystère de son intention de mener une nouvelle réforme de l’assurance chômage, de réduire les frais de transport médicaux, et de remettre à plat la prise en charge des maladies chroniques.

Des revues de dépenses ont été lancées et doivent aboutir dans les prochains jours afin d’identifier des pistes d’économies pour 2025. La Cour des comptes a été chargée de plancher sur le sujet des collectivités territoriales, la régulation des dépenses de santé, et la sortie des dispositifs de crise. Bercy travaille de son côté sur les aides aux entreprises, les dispositifs en faveur de la jeunesse, les politiques de l’emploi, la formation professionnelle et l’apprentissage, les dispositifs médicaux, les affections de longue durée, les aides au secteur du cinéma, l’absentéisme dans la fonction publique, et les mesures de maîtrise des dépenses immobilières des ministères sous loi de programmation.

It’s so hard to get your hands on an Hermès Birkin bag it should be illegal.

That’s according to two would-be Birkin buyers who filed a complaint against the French luxury brand in a Northern California district court on March 19.

The pair have accused Hermès of exploiting the “incredible market power” that comes from the “unique desirability, incredible demand and low supply” of its most prestigious bag to drive up prices and increase their own profits. The plaintiffs allege that access to Hermès’ perpetually sold-out Birkin bag is predicated on the purchase of other products, resulting in an “illegal tying arrangement” that violates US antitrust law.

Hermès’ enigmatic selling practices — where the most desirable items like Birkin and Kelly bags are offered intermittently and usually to clients who already have a purchase history at the brand — have been endlessly dissected in fashion circles, and more recently have become the subject of countless TikTok videos and Reddit threads about how to play “the Hermès game,” where creators offer tips on how to get their hands on prestigious Hermès items through carefully coordinated interactions with sales associates.

Tightly controlled distribution and scarcity helped make the Birkin one of fashion’s most consistently covetable products and an asset class all its own (prices can more than double at resale). Hermès’ ultra-exclusive positioning has allowed it to keep outperforming the market even as most other luxury brands see demand slowing from post-pandemic highs. Revenue rose 21 percent year-over-year in 2023, while net profit was up 28 percent. But now, it’s potentially landed the brand in legal trouble.

Last year, Hermès told BoF it “strictly prohibits any sale of certain products as a condition to the purchase of others.” Whether the case will go to trial remains to be seen. Still, the complaint could have implications across the industry. Other brands, including Rolex, Chanel and Celine have fielded similar accusations (if not legal complaints), particularly in China, where shoppers have decried rising barriers of entry to sought-after products.

BoF unpacks Hermès’ selling system and what the lawsuit means for the Birkin-maker and beyond.

Like most luxury houses, Hermès tightly controls its distribution — it sells its leather goods only through its own stores, where stock is never marked down. Birkin and Kelly handbags in particular aren’t sold online and sometimes aren’t even displayed in stores.

The brand’s retail experience varies from city to city; local Hermès staff are given a long leash to determine how its handbags — for which demand outstrips supply — are doled out. Some bags are allocated via waitlists, others offered at the sales associate’s discretion (many shoppers vie for attention by trying to seem extra stylish or wealthy). Others are reportedly sold on a first-come-first-serve basis (particularly at the brand’s original flagship store in Paris). Clients’ preferences are registered, but when customers are offered a particular Birkin, they don’t necessarily get to choose the style or colour.

The ambiguity of the process has sparked speculation around who gets a bag and why. TikToks, YouTube videos and Reddit threads on the “Hermès game” detail shoppers’ paths to nabbing so-called “quota bags” (even the most loyal Hermès customers are only allowed to indulge in these styles limited times a year). Creators offer advice on what to say, how to dress and when and where to go to better their chances of scoring. Customers share theories about how much to spend on lipsticks, sweaters, sandals and dog beds to secure an offer or a preferred style — with some estimates climbing into the tens of thousands. Other commentators share reproof for Hermès’ manufactured exclusion of shoppers from already exclusionary-priced products.

“You have to buy their shoes, their pillows … that little $900 horse to show your appreciation for the brand,” said one TikTok user. Another referred to the process as “pledging allegiance to the brand.”

Others tell stories of snagging sought-after bags without spending heavily on other items, suggesting that the alleged practices are not completely systematic — or that the most vocal shoppers are choosing to go overboard (perhaps because they are unwilling to wait months for a bag offer).

Hermès can only produce so many of the handbags each year, and it has to decide who gets them somehow.

“[Hermès] is driven by supply, not demand ...” said Erwan Rambourg, global head of consumer and retail research at HSBC. “It is not going to wave a magic wand and suddenly be able to produce a lot of products.”

Saving them for their biggest — or highest-spending — clients could simply be savvy business. Plus, it drives mystique.

The system could help to preserve balance between leather goods and other categories in Hermès’ business — which has long been a priority for the company, as it employs thousands of French artisans specialised in skills like weaving silks, painting enamel bracelets or even silk-screening its leopard-motif beach towels.

A more balanced sales mix and long waitlist for key products help the brand maintain consistency year-over-year, making it more appealing to investors.

Prioritising clients who spend heavily on other categories also could de-incentivise resellers looking to flip bags for a profit.

Those resellers pose a looming challenge for the brand: As more people can get the exact Birkin they want with the click of a button online, Hermès will have to find more ways to drive excitement for its products beyond how hard it is to get them.

Counsel for the plaintiffs (the legal teams at California-based Setareh Law Group and Haffner Law) claim Hermès is in violation of US antitrust regulations that prohibit abuse of market power through bundling goods or tying them to other purchases. Tying occurs when the sale of one product is made on the condition of purchase of another product. A seller also must have enough market power to restrain the free trade of a good. Microsoft, for example, was accused of the same type of antitrust violation for compelling users of its operating system to also use its browser in the 1990s.

Longi founder Li Zhenguo is laying off thousands of staff in an industry grappling with oversupply

In December last year, Chinese solar panel billionaire Li Zhenguo addressed the UN climate change conference in Dubai, promising a “benevolent and equitable” energy system to support the world’s decarbonisation.

“The opportunities for everyone to contribute to the fight against climate change through renewable energy solutions are boundless,” Li said.

But three months later, the founder of Longi Green Energy Technology has been forced into retreat as a result of a global supply glut, firing thousands of factory workers and new office staff as the industry grapples with a collapse in prices. In China, the lay-offs have sparked criticism of the company’s corporate culture.

Longi, one of the world’s biggest solar panel manufacturers, said last week it expected to cut 5 per cent of its 80,000-strong workforce after Bloomberg reported the company was planning to slash 30 per cent of its staff. Longi said the 30 per cent figure was “false”, though experts said the eventual job losses were likely to be higher than 5 per cent after solar module prices halved over the past year.

The pressure on Li comes after a production boom in China resulted in oversupply. The job cuts threaten to test Li’s reputation with the government in Beijing at a time of slowing economic growth and concerns about industrial overcapacity. Overseas, he faces a world increasingly polarised by China’s dominance of global supply chains for renewable technology, including electric vehicles, wind turbines and solar panels.

Li graduated from Lanzhou University, in China’s northern Gansu province, in 1990. He initially worked at a state-owned computer chip factory before founding Longi. Two of his university classmates serve as company executives.

Longi was one of several Chinese companies, private and state-backed, that accounted for more than 80 per cent of global solar production, the result of decades of deep state support and rapid domestic growth. Listed in Shanghai in 2012, it reported annual revenues of nearly Rmb130bn ($18bn) in 2022, up from Rmb54bn in 2020.

As of October, Li and his wife Xiyan were worth about $5.7bn, ranking just outside the 100 richest people in China, according to the Hurun Research Institute, a group tracking wealth in China.

Experts said Li’s fortune reflected the success of a series of breakthroughs in solar materials and manufacturing that have significantly improved the efficiency and longevity of solar panels. Longi’s advances include the replacement of polycrystalline material with monocrystalline in solar panels, allowing greater power production, as well as diamond wire cutting technology, which reduces the time and cost of manufacturing.

Li plays an important role in the Chinese Communist party’s plan to boost the country’s energy security, said Alex Payette, chief executive of Cercius Group, a consultancy that specialises in elite Chinese politics.

“It is important to remember that Li Zhenguo directly plays his part in Xi Jinping’s self-sufficiency, domestic self-innovation programme — to secure China’s own supply chains — and of course, military-civilian integration strategy,” Payette said.

The solar industry is cyclical, resulting in periods of boom and bust. Analysts have warned that massive job cuts across the industry are inevitable after several years of excessive focus on output rather than on sustainable profits.

Xuyang Dong of Climate Energy Finance, an Australian think-tank, noted that at of the start of this year, China had more than 1,000GW of solar module production capacity in development for domestic and international markets, a far higher amount than current domestic demand. China needs around 280-320GW of new solar capacity a year until 2030 to reach its dual carbon targets.

“The amount of money saved by laying off staff is insufficient compared to the 40-50 per cent decline in prices in the market over the last 12 months,” she said.

Dennis She, a Longi vice-president, told the Financial Times last month that the company’s factory utilisation rate had fallen to as low as 70 per cent and that industry consolidation was likely to follow.

“You have to be very tough at this moment,” he warned, adding that the company would try to increase its market share as smaller companies and newer entrants to the industry struggle to survive.

The Chinese solar industry’s expansion is coming under increasing scrutiny, especially in the US and Europe. In January, Brussels said it was considering emergency support measures after a flood of cheap Chinese equipment sparked a series of factory closures.

That same month, a bipartisan group of US senators called on President Joe Biden to increase tariffs on Chinese-made solar imports. In August, the US Department of Commerce found Chinese producers, including Longi subsidiary Vina Solar, “were attempting to avoid the payment of US duties by completing minor processing in third countries”.

However, there are few signs that the company’s global ambitions have been dented, said experts. Longi already has factories in Vietnam and Malaysia, a joint venture with Invenergy in Ohio and sales offices in the US, Australia, Japan, India and the UAE. It is also in talks to enter Saudi Arabia through a local partner.

Yanmei Xie, a China analyst at Beijing-based consultancy Gavekal Research, said Longi had proved itself to be “quite adaptable” through several rounds of tariffs levelled at Chinese solar companies by Europe and the US over the past 15 years.

“This is not a new wave of protectionism. The international backlash against Chinese solar exports started quite a while ago and mostly has proven to be fairly ineffective,” she said.

Li and his lieutenants are trying to convince governments they risk slower decarbonisation of their economies if they restrict Chinese companies from their renewable energy supply chains. They argue China should not be seen as a threat to the energy security of other countries.

“China is not going to export sunshine,” said She.

The technology is transforming all areas of the sector, with new roles generated and more traditional, lower-skilled jobs at possible risk

Energy companies are increasingly leveraging artificial intelligence technology to improve the efficiency and sustainability of their operations. And it is already transforming critical functions: from lowering carbon emissions to mitigating cyber attacks and predicting mechanical failures.

In the process, the technology is generating new job opportunities, for AI ethics specialists, software developers and data engineers across the sector. However, experts warn that AI could also displace more traditional energy jobs.  

Use cases: emissions monitoring, infrastructure routing, supply management, cyber defence  

With energy-related carbon dioxide emissions reaching 37.4bn tonnes for the first time last year — an increase of 410mn tonnes, or 1.1 per cent, on 2022 levels — many companies are exploring ways AI in which can help reduce their carbon footprint.

Shell, for example, has developed an AI tool for monitoring methane emissions. This “uses wind and concentration data to help us understand the origin and quantity released”, explains Dan Jeavons, vice-president of computational science and digital innovation at the oil and gas company.

AI will optimise the efficiency of energy systems by “reducing the amount of power needed to be generated”, he adds. It could also create “entirely new low carbon-footprint energy systems” and enable suppliers to monitor greenhouse gas sinks. 

Gert Vermeiren, European managing director of environment, water and energy at global infrastructure consulting firm Aecom, says AI will improve the cost-effectiveness and accuracy of energy infrastructure. Engineers, for instance, working on pipelines and power lines could use AI to “generate a viable route shortlist in seconds” instead of several days. 

In addition, AI offers operations engineers “a more strategic, whole-grid view of supply”, allowing them to analyse energy generation and usage patterns to “plan supply more efficiently” and balance the “use of different sources of low carbon generation in a dynamic environment”. He adds: “For the customer, this means supply is much more reliable.”

Energy asset managers can benefit from AI tools, making it possible to predict system failures and inspect and repair them accordingly. “This not only addresses productivity gains but safety as well,” says Vermeiren.

Scotland-based provider SSE has found AI-powered energy forecasting to be extremely useful. It is using technology to “forecast energy usage at the distribution system operator level” and analyse “future energy demand at a local level”, notes SSE Energy Solutions digital services director Eunice Mabey. It gives businesses “greater accuracy and certainty on their future energy demand and cost while enabling energy flexibility”. 

The company is also using AI for optimising large energy generation systems in the healthcare and academic sectors. “It [AI] analyses past energy performance and operation to produce optimised running schedules to lower energy costs and carbon emissions,” Mabey explains.

Mona Schroedel, a managing associate at UK law firm Freeths, says AI-powered algorithms could streamline energy trading research — by “surveying enormous swaths of information and detecting patterns and anomalies”. She suggests the technology could help energy companies monitor and detect cyber security threats, as well, which are increasing in scale and sophistication. 

Amanda Ahl, grids and utilities associate at the energy transition research body Bloomberg NEF, expects AI to “play a larger role in grid design and planning”. Ahl says this “accounted for 7 per cent of AI activities in the power sector in 2023”. 

Jobs created: systems modellers, ethics officers, cyber security experts

As energy companies continue integrating AI into day-to-day operations, many will require staff with the data science and AI development skills to create “the next generation of predictive models”, according to Dr Augustine Ikpehai, senior lecturer in electrical and electronic systems at Sheffield Hallam University.

Muhammad Wakil Shahzad, assistant professor in Northumbria University’s mechanical and construction engineering department, agrees that system modeller engineers will be in demand. Companies will need people who can apply AI and computational modelling to “simulate and optimise complex energy and end-use systems”, he says, as well as data analysts who can “extract insights to optimise energy production, distribution and consumption”.

But, to ensure AI algorithms are not used for the wrong reasons, energy companies must appoint AI ethics officers, too, argues Derreck Van Gelderen, AI energy lead at management consultancy PA Consulting. He says their job will be to ensure “AI systems are designed and used in a fair, transparent and responsible manner”.

Cyber security professionals will also play a bigger role in keeping future energy infrastructure safe from rising online threats, according to Kumar Parakala, president of digital transformation specialists GHD Digital: “As bad actors become more sophisticated in their attacks on critical infrastructure, including the energy sector, the demand for cyber security skills will increase in a bid to be one step ahead in knowledge, skills and approach.”

Jobs lost: inspection and maintenance staff 

While the rise of AI-powered energy systems and infrastructure will generate new jobs, this could come at the cost of more traditional roles. Ikpehai expects AI to displace low-skilled energy jobs, in particular. 

Energy companies could, for example, use drones and computer vision systems for manually inspecting transmission lines and pipes. However, humans will still need to check and review the results generated by such systems, he adds.  

Traditional inspection and maintenance roles that expose people to hazardous working environments should be automated, says Van Gelderen. He points out that the Sellafield nuclear waste management plant in Cumbria is using an AI-powered robot to keep its operators “out of harm’s way”.

But it is likely the petroleum sector will suffer most from AI-related job losses, says Parakala. In this area, mechanical work is “being replaced by robotics and AI automation”.  

More generally, AI will automate repetitive maintenance tasks in areas such as energy plant operations and tasks conducted by junior supervisors, according to Tom Fairbairn, distinguished engineer at real-time data platform Solace. But, he adds, energy workers affected by these job losses could upskill in areas “where human judgment, creativity, and problem-solving skills are irreplaceable”. 

Transformative changes are still 10 to 15 years away, experts predict

When Robert Wachter, chair of the Department of Medicine at the University of California, San Francisco, reflects on the extent to which healthcare jobs will be disrupted by artificial intelligence, he recalls an apocalyptic speech given by the British-Canadian computer scientist Geoffrey Hinton.

Hinton sent shockwaves through specialist medical education with his warning in 2016: “We should stop training radiologists now. It’s just completely obvious that, within five years, deep learning is going to do better.”

The technology seemed so good that it would soon replace humans. But the reality has been rather different. Beyond a few applications — for example, in mammography and colonoscopy — evidence of AI’s superiority over doctors remains thin. Human intervention is still essential.

“Eight years out, we can’t hire enough radiologists, there’s so much demand,” points out Wachter, who is also a director of the Josiah Macy Foundation, which focuses on medical education. “AI is not perfect; and, in malpractice, you want to sue a human.”

AI has the potential to significantly transform employment in many aspects of healthcare — from basic research to clinical care, patient monitoring and medical administration. But Wachter’s comments are a reminder that its impact in transforming human roles and the timescales for such changes to take effect remain far from certain.

“I’m most impressed by our ignorance on AI,” says Wachter. “It has speeded up mammography, but there are lots of areas where it is not quite as good. Diagnosis is not just looking at digital dots but understanding and placing them in the clinical context. The number of scans is growing faster than AI is advancing.”

AI — and notably generative AI — offers considerable potential for improving treatments. Some breakthroughs have already been felt. In drug development, there has been much buzz around the identification of compounds such as treatments for antibiotic resistance. In 2021, a first practical example emerged of AI identifying a drug that has been put into practice: baricitinib, an existing treatment for rheumatoid arthritis was shown to be a way to treat complications of Covid-19.

Overall, consultants McKinsey estimated in a report in January that AI could generate $60bn-$110bn a year for the pharmaceutical and medical-product industries by identifying compounds for possible new drugs, speeding their development and approval, and improving the way they are marketed.

McKinsey showed that since ChatGPT’s release in late 2022, the number of AI-related job listings has quadrupled. The number of positions offered grew by 43 per cent annually across the top 10 pharmaceutical companies alone since 2018.

The consultancy highlighted AI’s capabilities, including knowledge extraction, content and compound generation, customer engagement, and coding and software generation. McKinsey attributes these strengths to “gen AI’s truly multimodal nature: foundational models are built not just on language but also on images, omics [data analysis of an entire biological system], patient information, and other types of data”.

A report by the Brookings Institution pointed to AI’s roles in functions including post-treatment monitoring and follow-up, and in routine information gathering, particularly through the collection of information via chatbots by “engaging with patients in understandable language, resolving uncertainties, and summarising data for healthcare providers”.

Eric Topol, executive vice-president at Scripps Research, says: “AI is hugely transformational but these things always take longer than you might project.” Yet he already sees some applications elsewhere in his own medical practice.

These include note-taking in consultations — freeing doctors from their keyboards to spend more time and eye contact with patients. “That gives the physician the ability to get rid of all notes, tackle [their own] memory issues that are often a problem.”

Future doctors and other healthcare workers should not despair about their own displacement or redundancy. As a recent Pew Research survey highlighted, 60 per cent of Americans would be uncomfortable with their doctors or other providers relying on AI for their healthcare.

“We’ll always have human oversight — you are always going to want to talk to an experienced, empathetic physician,” says Topol. “Doctors, since before Hippocrates, ruled the roost and tended to be control freaks. The digital era has propelled the patient into a power position . . . we’re going to see that trend of democratisation get into high gear.”

He also sees technology driving changes to human medical recruitment, and training. “We were picking brainiacs to be physicians. We need people with deep empathy.” But he adds that far greater education is needed around AI. “It requires a reboot of our curriculum. There is no medical school in this country that has fully incorporated AI.”

Wachter adds: “I do believe that AI will be transformative, but healthcare is so stressed, [cash-]strapped and expensive that for the next 10 or 15 years it is unlikely whole medical groups will get fired. So much is wasteful, there is so much friction. Healthcare and education are the two fields that have been slowest for AI. There are no unemployed doctors or nurses.”

Fund manager holds lower than normal position in longer-dated US bonds, and prefers UK, Australia and Canada

Bond fund giant Pimco is holding a smaller than usual position in US Treasuries and prefers the bonds of countries such as the UK and Canada, as it believes inflationary pressures may lead the Federal Reserve to cut interest rates more slowly than other major central banks.

Andrew Balls, chief investment officer for global fixed income at the $1.9tn-in-assets firm, told the Financial Times that weaker economic growth in some countries is helping ease price pressures there faster than in the US.

“Outside of the US . . . we are seeing more evidence of inflation correcting,” he said. “I think you see the balance of risks on the Fed going slower [in cutting rates] than is priced in but outside the US there is some risk of central banks delivering more than is priced in.”

Balls prefers longer-dated government bonds — which are more sensitive to changes in interest rates — outside of the US, and holds a smaller position than the benchmark index in the US. Markets currently anticipate three 0.25 percentage point cuts by the Fed and Bank of England this year, while for the European Central Bank it is closer to four.

US inflation has come in above analysts’ forecasts in January and February this year. Last week, Fed chair Jay Powell played down the recent uptick as the US central bank stuck to its forecast of 0.75 percentage points of interest rate cuts this year.

Powell also suggested it was too soon to know whether recent signs of stickier than expected inflation, especially in the services sector, would last. But he said he did not think recent readings had “really changed the overall story” of price pressures easing to 2 per cent.

Balls said that while his baseline expectations for inflation and Fed rate cuts were similar to market consensus, he sees “the risks towards stronger activity and sticky inflation.

“You have an ongoing US exceptionalism theme,” he added.

He also warned that the US’s yawning budget deficit — which the Congressional Budget Office estimates will rise by almost two-thirds over the next decade to $2.6tn — would be likely to push up long-dated Treasury yields, reflecting a fall in prices.

Ten-year US borrowing costs have risen to 4.2 per cent from 3.9 per cent at the start of the year, but remain far below a peak of more than 5 per cent reached last October when markets were worried about bigger than expected government borrowing plans.

“You can imagine that happening again,” Balls said, referring to the rise in yields last autumn.

“Both the Democrats and the Republicans seem unconcerned about the level of the fiscal deficit . . . It does seem likely that without having something exciting happening [like the UK’s 2022 gilts crisis] you could have a slow grind to higher term premia.”

Balls said his preferred places to have exposure to bonds more sensitive to changes in interest rates were in the UK, Australia, New Zealand and Canada. In December the FT reported that Pimco’s chief investment officer believed the UK was at risk of a serious economic downturn and that he had been running larger than usual bets on gilts.

Last week the Bank of England kept rates at 5.25 per cent for a fifth consecutive meeting, as widely expected. However, in a surprise to markets, the two most hawkish rate-setters on the monetary policy committee fell in line with the majority and voted to keep rates on hold, while one member voted for a cut.

BoE governor Andrew Bailey told the FT last week that markets are right to expect more than one rate cut this year and he is increasingly confident inflation is heading towards target.

Balls said his funds have a larger than normal position in gilts and he is not worried about a potential borrowing splurge ahead of a general election. In contrast, in 2019 he warned that a post-election borrowing binge promised by all major political parties could add to pressure on prices.

“I think both sides will have very similar fiscal policy and in the post [former prime minister] Liz Truss environment we tend to expect the UK to be very orthodox in terms of fiscal policy,” he said, referring to the 2022 gilts crisis triggered by an announced £45bn of unfunded tax cuts.