Niall Gallagher, Investment Director, Europe Equities, argues that the US Inflation Reduction Act is hugely important in the context of the drive towards decarbonisation, as well as the scope for significant investment in more resilient supply chains and a move towards a more regional, less global approach.
01 June 2023
Click here for an article by Stephanie Maier, Global Head of Sustainable and Impact Investment, which gives more detail on the Inflation Reduction Act.
Do global investors understand the significance of the Inflation Reduction Act?
We've argued for quite some time that the Inflation Reduction Act in the US is very, very significant and when you add it to the Chips Act in the US and the various different European programmes, it's very, very significant. Now essentially there's a number of aspects to this. But the key which we've talked about for a long time is the need to decarbonise. The need to decarbonise is going to drive a phenomenal amount of investment, a big pick up in global capex on physical assets right across the world and these are some of the mechanisms to enable it.
But it goes beyond that. It's not just decarbonisation. You've also got the need for more resilient supply chains, deglobalisation or more strategic independence for different regions, I guess, is another way of putting it. So reshoring some semiconductor manufacturing back into Europe and the US; that adds another layer to it. The need for resilient supply chains and more materials that go into decarbonisation being more regionally local. All of these things are going to drive a very big pick up in investment.
Now to the Inflation Reduction Act itself, in the US, you have to add to the 400 billion roughly. There is state support, too, which adds to the federal support. And then there is a multiplier from the private sector as well. Some US government estimates suggest that the total programme could be worth USD 3 to 4 trillion, which is obviously big in the context of roughly USD 25 trillion of US GDP. But the bit about the Inflation Reduction Act that isn't that well understood is when you go and talk to companies they'll tell you to maximise the value of the federal subsidies. You want to build the projects quickly, so actually it gets front loaded and it's also uncapped. Some of the subsidies are credits, are uncapped, so if you have a much bigger development of green hydrogen or carbon capture and storage or whatever it is, actually it could be well beyond the USD 380 billion that the US government has talked about.
So I think it's very, very material. It also really highlights a big point that people haven't quite fully internalised yet. We're in a very different fiscal policy environment now than we were pre-2020. We're going to see much larger fiscal impulses; that has implications for the macro settings. It has implications for what gets spent, where the demand goes, and I think that is a really big change, and it's one of the things that feeds into our view that we are fundamentally in a different environment than the one that pertained from 2008 to 2021.
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