We need even closer ties to US, says HAMISH MCRAE

The year since Russia invaded Ukraine has taught us many things, including the utter dominance of the US in military and geopolitical terms – not just as the leader of the West but also how essential American firepower is to European defence.

Less attention has been paid to its economic dominance, which is just as important because its financial and industrial strength underpins everything else.

We can now see that not only did America make a swifter recovery from the pandemic than any other G7 economy, but that the war has actually strengthened the US vis-a-vis Europe. Both directly, as a result of its role in helping replace Russian gas, and indirectly because it is seen as a safe haven for investment in relation to the more exposed Europe and Japan.

The dollar has come back a bit from its peak last autumn, but its weighted index is roughly 10 per cent up on the level of a year ago.

If, as sadly seems all too likely, the war drags on for some time yet, this economic heft will matter more and more.

America has the resources to go on supporting Ukraine for the very long term. You can catch a feeling of this strength in many ways. Companies are hiring at a record rate, with an additional half-a-million people on payrolls in January, pushing unemployment down to 3.4 per cent, the lowest level since 1969.

Inflation is a huge worry but the consumer price index is 6.4 per cent, lower than that of the eurozone, (8.6 per cent), and the UK, (10.1 per cent). The great US consumer is still buying, with retail sales jumping 3 per cent in January. This strength can be awkward for us. The Federal Reserve is determined to crunch inflation down to 2 per cent and will raise interest rates further to do so.

Janet Yellen, chair of the Fed, said on Friday that she believed the economy could avoid recession but there was still more work to do to bring inflation down. We are feeling the backwash. Higher interest rates in the US put pressure on the Bank of England to increase rates in the UK, and every time fears of Fed action hit the price of shares in New York, the London market gets hit too.

Look at the way the FTSE 100 index manages to clamber above 8,000, only to be knocked back when Wall Street turns down.

However, a strong American economy is on balance vastly better for the UK than a weak one.

The US is our largest export market by far, bigger than France and Germany combined. It owns the largest stock of direct investments in Britain, about one-quarter of the total, and is by far the largest portfolio investor.

As I noted here last week, foreigners own 56 per cent of London-quoted shares. Of that, North Americans (which of course includes Canadians) have 46 per cent – so roughly one-quarter too.

Now look forwards. The importance of the US to Britain is likely to increase in the years ahead. One effect of the war in Ukraine has been to unite the West, but it also has forced Russia to find new markets for its oil and gas. That in turn has stitched Russia closer to China and India. Figures are hard to come by, but oil tanker traffic gives an indication of how Russia is getting its oil out.

Bloomberg has been monitoring this and concludes that India has provided a lifeline for sales of Russian crude. China and others have bought more than before, but India has basically replaced Europe as the biggest buyer. India is free to buy the cheapest oil it can find, as indeed is China. But both should be aware the US will push back against countries it feels are acting against its interest.

Its principal economic rival is of course China, and you can see mounting signs of push-back there, including the recent bans of exports of its chip technology.

At the moment India seems a useful counterweight to China, certainly for American companies, and certainly in the face of China’s threats about Taiwan.

Apple plans to move a quarter of its iPhone production there. But one of the many lessons of the past year is that seismic shifts in global politics can happen swiftly and we need to be prepared for that.

My key message is this. A dominant US will push back against China for the foreseeable future. It will always act in its own self-interest, often brutally so, and we should expect no special favours. But we must be clear that it is in our own self-interest to build an even closer economic relationship with our big cousin across the water.