Economists are split between those who see the world economy coming together and those who believe its major trading blocs are heading in opposite directions. It might only be a couple of weeks before we find out who is right.
On 16 December Janet Yellen, the head of the US central bank, is expected to push up interest rates for the first time since 2006. The nudge upwards from 0.25% to 0.5% may not seem like the Federal Reserve’s most momentous financial intervention, but 18 months ago even the thought of such a move caused panic across the world.
Back then, the eurozone was still a long way from cobbling together a deal to end the Greek crisis, Japan was struggling and China was beginning to feel the after-effects of its post-crisis borrowing binge. A rise in the cost of borrowing US dollars was the last thing these countries needed.
The optimists argue that, today, the situation is transformed. The US can boast an even longer track record of growth; Japan is pushing ahead with Abenomics, the mix of government spending, monetary stimulus and business reform named after prime minister Shinzo Abe; and China’s slowdown has bottomed out. Europe can look back on 2015 as a solid if unspectacular year that saw most eurozone countries continue their modest recoveries.
A rise in US interest rates will be met with equanimity across the world, argue the optimists, because everyone else is in better shape, if not growing quite as strongly.
It a view with some high-profile backers in the investment business. The executive who wields $500bn of stocks and bonds for US fund manager Wells Fargo Asset Management was in London last week explaining how the global recovery would send oil prices back to $75 after tumbling to $43 last week.
How, then, to explain the fuss over last week’s decision by the European Central Bank to increase its efforts to stimulate the eurozone economy, and the reaction from markets when ECB boss Mario Draghi failed to match his tough words with action?
It would be easy, not to say comforting, to believe Wells Fargo’s all-encompassing growth story, if the signals of a third phase to the financial crisis could be easily dismissed. They can’t.
The US is most certainly galloping along and the UK appears to be keeping pace. On this aspect of the optimists’ theory, analysts can agree. The question mark hangs over the eurozone, Japan, China and the recession-hit Bric countries of Brazil and Russia.
Far from bottoming out, the China slowdown may continue for some time to come. Almost as importantly, the only lever Beijing can pull to keep GDP chugging along at something near the 7% it needs is a devaluation of its currency, the yuan.
If the devaluation continues, it will destroy the European Central Bank’s strategy, which also rests on a prolonged devaluation against all its major trading partners. At the moment the euro is low against the dollar and pound, but the Japanese have pushed down the yen by a third in the last couple of years. Unsurprisingly, Tokyo has no intention of undermining Japan’s uncompetitive businesses with a higher-value currency.
If the Chinese follow the same path and devalue the yuan, many of Europe’s struggling economies – Italy, Portugal and France, not to mention Greece – will see their exports become more expensive, pricing them out of important markets.
In these circumstances, euroland will need another boost, and in the absence of extra public spending by Brussels, Draghi must sign a bigger cheque, possibly early next year. It’s possible central banks can strike a balance that keeps all the major economies growing. Wages might rise and petrol prices stay low at the same time, boosting consumer spending and business confidence. However, the odds must be against it.
No ding dong merrily on the high street
The spending figures for Black Friday, Cyber Monday and the Saturday and Sunday in between are quite something. Online sales over the four days reached £3.3bn, including £1.1bn on Black Friday and £968m on Cyber Monday. This equates to £763,000 being spent every minute on Black Friday, up roughly a third on last year. But unfortunately for high street stores, this spending spree did not translate to “physical” shops.
Although retail bosses have not yet admitted it publicly, they are privately expressing surprise at the shape of spending over that weekend. Rather than flocking to the sales on Black Friday, consumers spread their spending over a week, and focused on grabbing deals online from the comfort of their sofa.
We’ll see the consequences of this over the next few weeks and in January when most of Britain’s retailers publish their results for the festive season. Last weekend’s events raise a series of key questions. Are high street shops left with unsold goods they now need to shift before Christmas? How much did the Black Friday sales cost, and has this damaged profits? Can retailers deliver customers’ orders on time? Who were the winners and losers?
We have already been given a glimpse of the answers, with Argos customers complaining of delayed deliveries and John Lewis publishing results that suggest some high street chains might have had a difficult day.
John Lewis enjoyed a record week, with sales in store and online rising 12% year-on-year on Black Friday itself. However, this is way behind the wider online growth reported, suggesting that John Lewis may have seen its share of overall spending fall.
When you consider that John Lewis is likely to emerge as one of the winners of Christmas – as it has for the past few years – and that it has a high-quality online business, this is a worrying signal for how the rest of the high street fared. The division between the winners and losers of Christmas 2015 could be stark.
Solidly built bonuses
A lot of problems would go away if our housebuilders were as efficient at construction as they are at designing share incentives for their executives.
Berkeley Homes builds one in 10 of London’s new homes, and said last week that it was on track to exceed by £500m the dividend target it set in 2011. That was good news for shareholders but better for five senior directors, who between them stand to collect 15.1m shares in 2021 if the targets are met. At the current price, the jackpot is worth £540m. A similar scheme at Persimmon could deliver £600m for bosses in 2021.
The economy could turn before then, of course. But how hard can it be to make money from housebuilding right now? The chancellor is distributing subsidies for homebuyers like confetti. The managers at Berkeley and Persimmon may work hard, but their potential rewards are mostly the function of a bull market. City fund managers were asleep at the wheel when they approved these schemes.
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