Growth or illusion?

People are queueing up to buy guns in the USA

People are queueing up to buy guns in the USA

Inspecting the strengthening of the USA economy compared to the UK, Roger Williams questions whether the stock markets are misleading us

Confidence continues to grow. It’s fed by a lack of bad news.

Most share buyers on the world’s stock markets continue to look back and see that prices have risen. They think recovery must be on its way. Corporate profits in many western economies are at a record high as a proportion of GDP (1). The worries about the impact of Europe’s debt problems and trade imbalances have been pushed aside as yet another quantitative easing-fed bubble is initiated. Even Japan has adopted this policy. “There’s no return in the debt market, so we might as well buy equities,” seems to be the thought.

No bomb has dropped on Iran. Netanyahu has had his possible worst excesses hampered by the needed votes of more moderate allies. So gold is losing its attraction. Stock markets on both sides of the Atlantic pound forward.

I don’t think this means a lot for us here in the UK. I understand why it does mean something in the USA. Despite the recent report on a small contraction in the last quarter of 2012 in the USA, the conditions there remain good, especially for our business.

In evidence I offer the following: firstly, word of further guns being banned has fuelled a buying frenzy in the USA. Anecdotal evidence includes the fact that one of the world’s largest producers of ammunition is sold out worldwide for 18 months.

Secondly, despite the increase in the oil price (Brent Crude is 114.67 as I write this), and that it may well be choking off growth in Europe and damaging the economics of production in China, it seems the USA is immune. It is covering nearly all of its requirements for gas, and increasing its oil production.

Thirdly, the US dollar continues to strengthen, up three cents against the pound this month.

Fourthly, I always compare the price of cars and domestic white goods between the USA and UK to see for myself the difference between our countries. It depresses me. Invariably, I get the feeling that we’re being ripped off in the UK. I did the comparison again while at SHOT Show and the same feeling quickly resulted. Car sales are recovering in the USA, as are new house prices.

graph4

Last, and far from being least, loans to consumers and small businesses are growing in the USA. Just look at the growth in commercial and industrial lending in the USA in the graph above.

Contrast this with the UK. Last year saw a November that registered a £3.1 billion fall in loans made. This was bigger than the average monthly fall of £934 million over the previous six months (2).

One of the large accounting firms opines: “There is hope that our financial sector will stabilise this year, with lending increasing modestly to post the first year-on-year rise since 2010” (3). In 2012, there was a seven per cent fall in lending to consumers and a four per cent drop in lending to businesses compared to 20113.

To make matters worse, the bureaucracy that now affects all aspects of business in Europe indicates that this is unlikely to change. UK banks (and European banks) are working hard to meet new solvency rules. These rules, among other things, require that all banks require more equity. New rules for insurance companies in Europe mean that the largest single potential buyer of such equity is to be precluded from buying it. Meanwhile across the pond, bank profits are rolling in, the US banks are as healthy as they have been in almost a century and liquidity is at 30-year highs (4).

Motoring on: The cars are rolling out of Asia, but it’s not a sign of all-round growth

Motoring on: The cars are rolling out of Asia, but it’s not a sign of all-round growth

With these differences, I can see a reason for improved confidence in the USA. Unfortunately, I can see no reason for it here. It indicates that if you wish to borrow in the UK, regardless of the size of your business, it will be difficult.

I have scanned other markets in the hope of seeing signs that the rest of the world may help provide some growth, and reasons to be more positive in outlook for the UK. But the view I draw is mixed.

Chinese imports of power-station coal did expand 30 per cent last year (5). Iron ore buying was up eight per cent last year (5). But both of these were at faster rates than consumption – the coal needed for the power generation in 2012 was exceeded, and the ore imported was greater than that required for steel production. The indications of stockpiling reflect the lower planned growth. Have things improved in the first month of 2013? It’s difficult to tell, but the Shanghai World Container Index does not show it.

Argos: An unlikely model of success for the gun trade?

Argos: An unlikely model of success for the gun trade?

Elsewhere in Asia, things are looking up. Container throughput at South Korean ports rose 4.1 per cent year on year for 2012, a second record high. Container rates were higher into US ports. Cars and mobile phones likely account for much of this. In the metals markets, steel billet and copper do not, looking at historic prices over the longer term, seem to be breaking out of their patterns.

My conclusion is that the equity markets correctly reflect potential US conditions but do not presage much of an economic improvement in the UK. The EC continues to dither. European trade imbalances remain unchecked. Graft, cheating, incompetence and poor lending records will continue to dog Italy and Spain. Greece cannot recover. These are our neighbours, and with the EC being our number one trading partner, we cannot follow the USA. We look more like Japan and may well suffer the same fate, a lost decade.

On a more positive note, I was pleased to see the statistic that 75 per cent is the proportion of Argos’s online sales that are now collected in its high street shops (6). This bodes well for those retailers who are continuing to spend time and effort in improving their online presence. You can drive business to your stores: Sell online and push traffic through your doors with differential pricing.  Make it cheaper and more attractive to pick it up.

For many years, Toys R Us sold nappies at the best prices – almost a loss, I’m told. What it did was bring customers into their stores, and while there, their kids badgered their mums to buy them a toy. Perhaps cartridges are our nappies? Or junior shotguns and junior air rifles might work.

Roger Williams


(1)  Viewpoint by Jeremy Warner, Daily Telegraph, 31 January 2013
(2) Lending Falls as Businesses stay Cautious by Hugo Duncan Ernst & Young Item Club 29th December 2012
(3)  Bank Lending Predicted to Rise by Norma Cohen, 1 February 2013
(4) Great News for America…and America’s Banks by Dr. David Eifrig, Retirement Millionaire, 1 February, 2013
(5) Bloomberg, 4 February 2013
(6) Retail Viewpoint by Graham Ruddick, Daily Telegraph, 1 February 2013

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