Roger Williams looks at how 2016 has started for global and domestic economies, and how British RFDs can prepare for the year to come.
At the beginning of each year, writers on markets, economics and business either congratulate themselves on their predictions for last year and how close they came, or conveniently forget what they thought would happen. Of course, the latter is more common. As you know, I don’t make predictions. I believe understanding what has happened and what is the current ‘state of play’ is much more important and more likely to be of use to you in decision-making.
So following that principle, let’s look at where we are. Today we have a strong dollar with interest rates having risen in the USA for the first time in years. The UK, a recovering economy like the USA, is expected to follow suit. Both these countries have curtailed their quantitative easing (QE) programmes as deflationary fears subsided and growth was sustained. QE programmes in Japan and in the euro countries have not been declared fully successful yet.
The 28 economies of the EU produced a GDP in the third quarter of 2015 that was up 1.9 per cent on the year before, according to European Central Bank statistics. But, though EU unemployment has fallen to the lowest level in six years, it is still 9.3 per cent on aggregate. The biggest turnaround has been the Spanish economy, showing growth of 3.4 per cent – and though it has stubbornly high youth unemployment, it has seen a fall in overall unemployment of 500,000 jobs.
Germany, Sweden and the UK have continued to be the three sources of strength in the EU, but a second area of strength is now Eastern Europe: the Czech Republic, Poland, Slovakia and the Baltic S]states of Latvia, Lithuania and Estonia. How much of this recovery is down to QE? I have no idea but I am sure that the weakening of the euro against the dollar has had a significant impact. Mid-2014 to now, the euro has fallen in value by over 20 per cent, from around $1.40 to $1.10, according to Globex Online.
In Japan, QE has been in place since 2013, yet if not for an upward revision in the third quarter figures in 2015, Japan would be entering its fourth recession since the 2008 financial crisis. Even so, growth is averaging only 0.8 per cent a year. There are structural problems in Japan, which QE is unlikely to solve. Well known is Japanese consumers’ keenness to save, which mitigates against a consumer-led recovery like in the UK. Perhaps less well known is the problem of an aging and declining work force, combined with one of the lowest participations of women. This makes growth very difficult. In 2014, although the yen fluctuated against the US dollar, it ended the year pretty much where it started, at ¥119.
In China, armed currently with $3.5 trillion of reserves and a $600 billion current account surplus (official China statistics), they appear to have shrugged off the 2015 recession by allowing loose money (money supply up 10 per cent), credit and local government bond issuance (up 14 per cent) to combine with fiscal spending (up 18.9 per cent) to push their programme of consumer buying. The Purchasing Managers’ Index for services has jumped to a 15-month high of 54.4. At the same time however, reflecting the problems and pricing experienced by the steel and other heavy industries, easy money has been unable to plug the gap created as China’s manufacturing sector contracted for a fifth straight month in December and China heads for its worst annual growth in 25 years. The Purchasing Managers’ Index for manufacturing is still below 50 at 49.7 and therefore still suggests a contraction with export orders declining for the 15th straight month.
You can see the theme running through these economies. Continued QE and easy money for all but the USA and UK, and these two still with only nominal rates. It is estimated that there is $6 trillion of global debt trading at interest rates below zero and $17 trillion below one per cent (Telegraph). We have used low interest rates and cheap money to paper over economic cracks; what concerns me is not just the huge potential for losses as rates now start to rise in the US but also, the question of whether it was worth it. Have the recoveries we have seen been brought about by the QE and loose money programmes? Or, as I think more likely, has the massive fall in the price of oil been the real saving agent? Brent Crude is down 32 per cent since the end of 2014. Whatever the truth, the worry must be that the potential for higher interest rates is only matched by the potential for higher oil prices, and neither is in our control. The room for interest rate cuts in the world’s largest economy seems to have gone. The Saudi government can’t pump any more than they are doing. It’s all a bit frightening and potentially unstable.
Turning to the smaller picture and to the UK, my concerns are focused on announced changes that will impact businesses and legislation that is starting to bite. The cost of doing business in the UK is too high, certainly for the steel industry, as we have seen. Much has been made of the cost of energy in this instance, as it is known that German energy costs are half of those in the UK (according to the Daily Telegraph) but I would submit that an equal contributing factor has been business rates. The CBI has estimated that business rates in the UK are five to seven times higher than those faced in Europe. In addition to this burden in terms of a high ‘rate’ of doing business, rates are particularly bad news for companies as they are payable regardless of whether a company is profitable or not. For retailers who own their own property, as a general rule, they are payable even if the shop is empty.
A further burden is being placed on businesses in the UK by our insurance costs. The recent floods bring a good illustration of the problem, with initial estimates of losses already at between £5 and £5.8 billion (Daily Telegraph) of which £1 billion is from uninsured or underinsured properties. Look at what followed from this: a major loss of capital and income (some of which will be from customers of the gun trade) but also time and effort. It is estimated that 45 per cent (Sunday Times) of large claims by businesses take an average of three years to settle. On top of this comes rising premiums and difficulty obtaining insurance after a substantial claim. It is my belief that the proposed Enterprise Bill will do little to solve this problem.
Furthermore, consider the announced likely changes to VAT and corporation tax. The move from monthly VAT returns will delay re-claimed cash and the requirement to file quarterly tax returns will be burdensome and costly, especially to small and medium-sized businesses.
In this red-tape and tax environment, it comes as no surprise that unlicensed products such as accessories and clothing are increasingly being offered over the internet. No RFD should be without an online presence. It is a cheaper and more effective route to customers but it also cuts the business risk and costs of rates, insurance and record keeping. In the gun industry, however, bricks and mortar will always feature, and I strongly recommend that you review your commercial policy and ensure your business interruption insurance covers a period long enough to deal with any potential dispute and related costs. The use of a specialist broker can be of enormous assistance here.
2016 would seem a good time to negotiate better prices from overseas suppliers; the Chinese need the business and sterling is strong against the euro. It is a time to be careful about administrative costs, however. Improve your record keeping to enable you to more effectively (if you need to) make a claim and to more easily and cheaply produce quarterly tax returns.