Quantitative easing aint so easy to quantify

European Union

Put yourself in the shoes of Jens Weidmann, president of the German Bundesbank and chief critic of a policy of quantitative easing (QE) for the eurozone.

Now that prices are falling in euro-land for the first time since the financial crisis, are there are any credible reasons to continue to resist a programme of bond-buying by the European Central Bank (ECB)?

Well, Weidmann could start by pointing out the eurozone already enjoys two of the supposed benefits of QE – low yields on long-term government bonds and a weak currency. Even Italy can borrow at 2% for 10 years and the euro stands at a nine-year low against the dollar.

Weidmann might also argue that, while headline inflation was minus 0.2% in December, “core” inflation inched up to 0.8%. Why not wait awhile to see if lower energy prices, which puts euros in the pockets of consumers and manufacturers, boost spirits and spark growth? After all, that’s what lower oil prices usually deliver. Isn’t QE, by contrast, a step into the unknown?

None of these arguments are convincing. The eurozone has just completed another year of miserable growth (0.8% is the ECB’s own forecast) and little improvement is on the cards this year (1%, say the same forecasts). The danger of doing nothing is that it becomes harder to get out of the rut.

It is true that nobody really knows how the QE medicine works but two of three countries that took a large gulp – the US and the UK – at least produced growth figures worthy of the name. The eurozone, by contrast, has stagnated. Deflation, whatever its immediate cause, may choke even more demand.

The best argument for QE, though, is the one that Weidmann might regard as the flakiest: the financial markets expect it. Nobody wants to be a slave to the bond markets, of course, but Mario Draghi, president of the ECB, has spent the past year dropping ever-heavier hints that he is in favour of pure QE. If the boss can’t get his way when deflation has actually arrived, investors will conclude that the ECB is simply dysfunctional.

Sainsbury’s in a trench

The first world war advert was a crass way to flog groceries, but Sainsbury’s did OK at Christmas. Like-for-like sales were down 1.7% in the 14 weeks to 3 January – not great, but better than most City predictions. On this measure of performance, Sainsbury’s probably beat quoted rivals Tesco and Morrisons.

Why the sullen share price reaction? The shares, after rising at the off, became one of few fallers in the FTSE 100 index. The answer is that minus 1.7%, to be followed by a predicted minus 2% in the fourth quarter, is a weak branch for shareholders to cling to. The worry is that Tesco is about to spoil everything with deep price cuts – starting on Thursday – that rivals will be obliged to match.

Sainsbury’s top brass tend to resent the suggestion that their fate lies in Tesco’s hands. Look, they argue, we’ve been competing successfully with Tesco for years; our prices are the sharpest they’ve ever been and are currently lower than theirs; in short, we’re know what we’re doing.

These are reasonable boasts. But the oldest rule in the supermarket book – especially true in deflationary times – is that not all the big chains can succeed at the same time. Tesco, humiliated over the past year and now under new boss Dave Lewis, will look to invigorate its UK business by pinching sales from elsewhere. On the assumption that Asda can look after itself, the finger is pointing at Sainsbury’s.

Lewis’s grand plan may yet turn out to be a remix of predecessor Phil Clarke’s puff and wind. He is constrained by Tesco’s white-elephant hypermarkets and a balance sheet that looks dangerously over-stretched. If Tesco’s price cuts are more headline-grabbing than deep, Sainsbury’s has a good chance of muddling through with only modest profit declines.

But Lewis, surely, understands that fiddling will impress neither Tesco’s customers nor its shareholders. Sainsbury’s investors are right to worry: their company is clearly capable of competing with a more aggressive Tesco, but the medium-term damage to profits is anybody’s guess at this stage.

No tears for boohoo

No tears should be shed for investors in boohoo.com: an instant halving of the share price is what can happen when you buy shares in online fashion wannabes at sky-high valuations. The reasons given for Wednesday’sprofit warning were mundane: autumn was mild and competitors were active. In other words, online clothes retailers suffer the same pressures as their high-street brethren. This should not be a surprise.

Powered by Guardian.co.ukThis article was written by Nils Pratley, for The Guardian on Wednesday 7th January 2015 19.27 Europe/London

guardian.co.uk © Guardian News and Media Limited 2010

 

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