Issue link: https://maltatoday.uberflip.com/i/1471449
8 NEWS 23.6.2022 W e all recall the internation- al problems associated with the 2007-08 financial crisis and the various bail-out schemes meted to countries in distress. We learned we needed to be frugal and set aside reserves for a rainy day. Nothing can compare to the disrup- tion caused in the great depression of the 1930s which led to the collapse of global finance and trade, and resulted in a downturn far longer and more severe than the rescue packages paid to pro- tect jobs and businesses during the two years of the pandemic. Granted, policy remedies were helpful, but the above- mentioned crisis exposed the economic profession's continued ignorance of the business cycle. Now inflation is still in single digits, but there is more to come and Europe may well end up ratcheting the inflation phenomenon and usher in a mild reces- sion (more so as a result of sanctions on Russia and the problem of releasing millions of tons in cereals/sunflower oil locked up in Ukraine). With such chal- lenging factors, the primary task for any management team is to defend margins and cashflow, which investors favour over revenue growth when GDP growth is slowing. at will require fighting harder down in the trenches of the income state- ment. Even if management keep rev- enues and costs under control, CEOs are discovering what their predecessors knew all too well: inflation plays havoc with the balance-sheet. at requires even tighter control of working capital (the value of inventories and what is owed by customers minus what is owed to suppliers). Many firms have misjudged demand for their products in the light of the ex- plosion in oil and gas prices apart from severe shortage of grains and fertilizer due to the bombardment of Ukraine ports by Russian destroyers. A recent surge in covid and sup- ply-chain bottlenecks caused Germa- ny's economy to shrink by up to 1% in the fourth quarter of 2021 compared with the third, according to an initial of- ficial estimate. For the whole year, Ger- man GDP rose by 2.7%, though output was still 2% lower than in 2019, before the pandemic. Other Asian countries suffered simi- lar challenges such as that the People's Bank of China had to cut one of its main interest rates. e reduction was small, but a signal to markets that officials are prepared to act to stabilise the econo- my amid covid and severe lockouts in Shanghai and difficulties in the hous- ing market. e main lending rate for mortgages was also cut.GDP grew by 4% in the fourth quarter, year on year, the slowest pace since the depths of the pandemic. ankfully, the Chinese economy officially grew by 8.1% for the whole of 2021. Back to Europe, and we observe how Britain's annual rate of inflation rose to 7.4%, its highest level in 30 years. Food prices are climbing at their fastest pace since 2008. Energy costs are also rock- eting, and are expected to soar even higher should the regulator's price cap is lifted (as is most likely). is jump in fuel prices has caused concerns to a number of households under "fuel stress", spending at least 10% of their in- come on energy bills. Yet, some good news for the British economy, GDP rose above its pre-pan- demic level for the first time in No- vember. Although that was before the new strain of Omicron struck. Consid- er Denmark and its measures to secure cheap energy from renewables. Over the years, it has installed enough wind turbines that, when at full capacity, no other source of electric power is re- quired. When Mother Nature takes a break and wind energy subsides then Den- mark has laid a subsea cable to Norway, which has ample hydroelectric poten- tial. Obviously, when the wind blows, both places can use Danish wind power, keeping Norwegian water in reservoirs. Further energy links from Denmark to the Netherlands, Sweden, Germany and Britain (planned for 2023) provide yet more options. When energy costs are skyrocketing, it is wise to add new links, in Europe, and electricity becomes a tradable com- modity. For a local grid manager, reduc- ing carbon emissions becomes a case of buying and selling the right contract as Malta is doing by its inter-connector. Germany, for example, was once a big exporter of power but is becoming an importer as it finishes shutting down its nuclear plants and phases out coal. Another immediate challenge is how best to reduce carbon dioxide from the atmosphere to arrest global warning. McKinsey, a management consultancy, pledged $925m over nine years to in- novate technology how best to remove carbon dioxide from the atmosphere. A systematic approach to reduce the carbon emissions from high-efficien- cy natural gas–based power genera- tion involves two fundamental choices: switching to zero or net-zero carbon fuels (eg. green hydrogen), or the use of post-combustion carbon capture. e former approach takes advantage of the fact that gas turbines are highly fuel flexible and can operate on a range of fuels including hydrogen. For a local grid manager, reducing carbon emis- sions becomes a case of buying and sell- ing the right contract rather than build- ing a solar or wind farm in the wrong place. Germany, for example, was once a big exporter of power but is becoming an importer as it finishes shutting down its nuclear plants and phases out coal. e gas turbine industry has been using fu- els that contain hydrogen for more than 30 years. Gas turbines generating elec- tricity have operated on fuels with hy- drogen concentrations ranging from 5 percent (by volume) up to 100 percent. is includes the use of hydrogen/nat- ural gas fuel blends as well as industrial fuels containing hydrogen. One example of an industrial fuel that contains hydrogen is syngas (synthe- sis gas), which is typically produced by gasifying coal or refinery residue. Syn- gas typically has about 30 to 40 percent hydrogen (by volume). e modern trend is for technological upgrades that may be needed to be ap- plied to existing gas turbines as well as new gas turbines to support the use of hydrogen. In our case, for example, the Electro- gas plant and BWSC system can both be upgraded to operate on blends of hy- drogen and natural gas. Exciting times lie ahead and Malta cannot afford not to catch up with advances in technology. Climate change, inflation and de-carbonisation George Mangion George Mangion is a senior partner at PKF, an audit and consultancy firm, and has over 25 years' experience in accounting, taxation, financial and consultancy services. His efforts have made PKF instrumental in establishing many companies in Malta and established PKF as a leading professional financial service provider on the Island