Davos delegates with heads in the clouds must tackle financial crisis on the ground


When the big names from business, government and central banking meet over the champagne flutes in Davos this week, the official theme is “mastering the fourth industrial revolution”.

The World Economic Forum has asked participants to chew over the rise of the robots and what it means for every aspect of human lives from jobs to the environment. No doubt their conversations will be fascinating.

But while Davos delegates chat about hypotheticals between canapes, beyond the mountain resort some very real problems are playing out. Wild swings on stock markets, a plummeting oil price and patchy economic news frrom the world’s two biggest economies, China and the US, have raised the spectre of a fresh financial crisis.

Economists at the Royal Bank of Scotland last week told clients to “sell everything” except high-quality bonds. Predicting a “cataclysmic year” in which stock markets could fall by as much as 20% and oil could slump to $16 a barrel, they invoked more than a whiff of panic when they warned: “This is about return of capital, not return on capital. In a crowded hall, exit doors are small.”

They were joined by the City of London’s most vocal “bear”, who predicted the world was heading for a financial crisis as severe as the crash of 2008-09. Albert Edwards, a strategist at the bank Société Générale, told the west to brace itself for a wave of deflation from emerging market economies. Central banks were unaware of the disaster about to hit them, he warned.

In the US, the S&P 500 index is down 10% from a record high hit last May. Larry Fink, head of the fund manager BlackRock, thinks stocks may fall another 10%. “I believe there’s not enough blood in the street,” the Wall Street veteran told CNBC.

Even George Osborne’s rose-tinted view has been darkened by the markets’ wild gyrations. The year had opened with a “dangerous cocktail of new threats”, said Osborne, warning against “creeping complacency”.

He is right there. When many families, and governments, are still picking up the pieces from the last global downturn, what they should really be talking about at Davos is what can be done to mitigate a new crisis.

Firstly, the men and women who make laws and set policies must take stock and recognise that wherever the world economy needs to go, it should not be starting from here. In the seven years since the collapse of Lehman Brothers, countless opportunities have been missed to clean up banking and address deep structural problems in the world economy.

If the Davos powwow needs a catchy theme, it all comes down to imbalances. The build-up to the last crisis was marked by imbalances in trade and the years since have been characterised by widening inequality in incomes.

The two are linked. With pay rising too slowly in the pre-crisis years, people did not have the money to buy the goods they were producing. So mountains of debt were amassed to fuel spending. The US in particular was relied on as the world’s consumer of last resort and its households leaned on rising house prices to borrow. Debt-fuelled consumption was taken as a cue for keeping interest rates low and a housing bubble inflated that was central to the crisis and slump of 2008-09.

Similarly, the countries producing the goods accumulated surpluses while others saw their trade deficits balloon.

Seven years on, those imbalances have not been addressed. Instead, hope has shifted from the US to China, whose burgeoning middle classes are viewed as the new big spenders.

Inequality has worsened as the benefits of a flood of electronic money pumped into financial markets in the form of quantitative easing have not trickled down to workers. Shares prices have risen but workers’ pay has flatlined.

In the banking world, little has changed. Global finance has not been tamed, merely told off.

And now as China’s growth falters, and people like Edwards warn we are teetering on the brink of a fresh crisis, what tools are policymakers left with? When interest rates are at, or close to, record lows, what levers can central bankers possibly pull? Now, that’s something for Davos delegates to get their teeth into. The robots can wait.

Solid sales for the supermarkets doesn’t mean the battle is won

So, party poppers all round for Tesco, Sainsbury and Morrisons: they had a far merrier Christmas than predicted.

Deals on alcohol and vegetables, together with enough staff to keep the queues down and shelves full, meant all three grocers improved their sales performance in December. Shares in the three chains jumped up on hopes that they might finally have found a way to fight back against Aldi and Lidl.

But Morrisons’s, Sainsbury’s and Tesco’s Christmas sales figures were only a surprise to those who had read the latest market share data too simplistically. The closely watched figures, from Kantar Worldpanel, monitor trends in total sales. As the big chains closed shops, total sales fell and improvements in those still trading were masked. The pace of growth also appears to have slowed at Aldi: it is possible Aldi’s core estate saw no sales growth at all in December.

But maybe the party poppers are little premature: the discounters are far from on the ropes. The slowdown in growth at Aldi’s established stores is unsurprising when the car parks are overflowing and there are queues at the checkout. Lidl, meanwhile, is still increasing sales at established stores as it attracts more middle-class shoppers.

Both have ambitious opening plans. Aldi will open 83 stores this year as it targets 1,000 outlets by 2022. Lidl is opening up to 50 a year. The new stores will only ramp up the German chains’ purchasing power and market share.

And then there is Asda. It appears to be losing sales at a quite spectacular rate: the suggestion is a 3.5% slide over Christmas. The problem is that having made its brand all about price, Asda is now struggling in a world where Aldi and Lidl are cheaper.

Until now, Asda has prioritised profits over sales. But it has already signalled a plan to step up price cuts this year. If it decides to take on the discounters even more aggressively, then the other big three will have to respond – and trade could get tougher than ever.

Heat is on the energy regulators

The big six energy row is back, despite missing a panto villain role this year because of the mild winter weather so far.

But the industry is back in the firing line as a cold snap focuses attention on heating, the cost of which stubbornly refuses to match the plunging oil price.

While the energy companies are as complacent as ever, the regulators are at fault here too.

Why did it take Ofgem and its chief executive, Dermot Nolan, so long to step up and condemn overcharging last week? And why has the Competition and Markets Authority (CMA) allowed 18 months to elapse before a radical shakeup of the sector?

But the outbreak of a new row over energy bills is a good thing. It will make it harder for the CMA to pull its punches, as many feared it might, when it delivers its recommendations for the industry in a matter of weeks.

Powered by Guardian.co.ukThis article was written by , for The Observer on Sunday 17th January 2016 09.00 Europe/London

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


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