America is reaping the fortunes of war after UK defence firms were sold off on the cheap, says ALEX BRUMMER

When we think about America’s economic resilience, most credit is given to Silicon Valley and Joe Biden’s big spending.

Students of Franklin D Roosevelt and World War II will know it wasn’t the New Deal alone which lifted the US out of the Great Depression but military spending.

There are echoes at present with the Wall Street Journal asserting that war in Europe (we could now add the Middle East) is boosting American output.

Industrial production in the US defence industry is flying and up 17.5 per cent since Russia launched its war on Ukraine two years ago.

The State Department reports £63.5billion of arms deals in the nine months to September 2023 – £40billion from Europe.

In demand: Ukrainian soldiers load ammunition to a military vehicle. Industrial production in the US defence industry is up 17.5% since Russia launched its war on Ukraine two years ago

Britain, through aerospace and defence champion BAE Systems, is among the beneficiaries of this trend.

The social, environment and governance (ESG) objections among investors to the UK’s vibrant military industry are fading fast.

BAE’s 2023 results, showing a 14 per cent lift in earnings per share, reflect this trend. Free cash flow at £2.6billion, at a firm which historically struggled to stay in the black, is up from £2billion last year.

Orders, at a trifle under £70billion, are £11billion higher than a year ago.

There is more to come. The present Middle East conflict will have improved the prospect of Saudi Arabia buying the next generation of Eurofighter, the Tempest.

As matters stand, BAE has reached agreement with Riyadh for a further five years of support for the existing Salam Typhoon project. Nearby Qatar has taken delivery of ten more Typhoons.

BAE chief Charles Woodburn cautions that earnings increases in 2024 will be in single digits at 6 to 8 per cent.

There are certain to be concerns about indigestion and quality control with such a vast order book and disappointing performance by the UK’s two new carriers may be a symptom of this.

The UK firm wins out over Continental rivals because of the trust it enjoys in the US, where it recently secured a ten year-contract for an ammunition plant.

It also provides vital fuselage components for the flagship America F-35 fighter.

Stakeholders have reason to be relieved that a proposed merger with Airbus in 2012 fell apart. Unfortunately, other UK defence companies such as Cobham, Inmarsat, Meggitt and Ultra Electronics were snapped up at what must now be regarded as bargain prices.

Command and control has passed into overseas hands – governmental and City blunders which should never be repeated.

Fragile finances

Numbers for Government borrowing and debt, a fortnight before the March 6 Budget, were certain to generate excitement.

This is especially true given that the surplus of £16.7billion is more than twice the £7.4billion in January 2023.

Much discussion, then, of headroom – space to cut taxes – in spite of efforts by the Chancellor to dampen down speculation.

Jeremy Hunt did the same for the Autumn Statement and delivered £21billion of tax breaks, but the great hope among Tory voters, of 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 is in surplus because it is when self-assessment returns are filed.

Secondly, borrowing costs dipped from the £7.1billion forecast by the Office for Budget Responsibility to £4.4billion as inflation fell.

The final fact is that buoyant tax receipts may have started to moderate. Lower inflation delivers shrinking interest rate bills but means the freezes on tax allowances, income, capital gains and inheritance levies, don’t deliver a receipts bonanza previously calculated at some £40billion a year.

What reduced inflation delivers, it also takes away.

Bonus bonanza

Among the people reaping rewards of peak inflation and interest rates are bankers at HSBC.

A bumper year, in spite of Chinese write-offs, saw chief executive Noel Quinn’s pay nearly double to £10.6million. The bonus pot of nearly £3billion was the highest in a decade.

In contrast, payouts to senior bankers in Asia, other than HSBC, fell below $1million (£793,000). HSBC largesse is hard to justify amid uncertainty about growth and asset prices in Hong Kong and Chinese markets.