With unprecedented levels of government debt meeting falling levels of personal debt, Roger Williams peers into his crystal ball and tries to decipher what this all may mean for the gun trade.
Noise wakes you up. Unfortunately, it can also hide things. A jackhammer breaking up pavements can hide the warning given by the big diesel engine of the dumper truck that is about to knock you down. Noise in data doesn’t wake you up. It covers up things that you should see. Ignorance does this too and there is plenty of both about at the moment.
During the current pandemic, “Why can’t we be more like Sweden?” is a common refrain. The first response should be, “Do you realise that the UK (particularly England) is one of the most densely populated countries in Europe?” Perhaps pointing out next that Swedes are better educated than us is also persuasive. Finally, it is matter of scale. The scale of the problem posed by Covid-19 is related to the size of the population, amongst other factors. The UK has a population of 67 million, which is over six times that of Sweden.
The next question I hear is, “Okay, but look at China, they have a huge population and are recovering better than we are?” The first response to this, should be, “I’m sure Nazi Germany would have performed better too, but you wouldn’t like the medicine.”
Any country that admits to putting 1.3 million into re-education centres (read, concentration camps) is one that can take drastic measures successfully. But who really knows how successful their response has been?
On the surface
China has released data this week revealing that industrial production is up 5.6 per cent in August at the fastest rate this year. Consumer spending ended a seven-month downward spiral, rising 0.5 per cent shielding sector falls by an 11.8 per cent increase in auto sales and a 25.1 per cent in phone sale.
While treating this information with the scepticism it deserves, trying to understand what is going on in the economy in China is worthwhile, not least because this is where Covid-19 originated and this should be a leading indicator of how the containment measures can impact any economy.
Few countries can impose such strict measures that will be adhered to as closely by so many. If containment is to be successful in diminishing the spread of Covid-19, then surely China may show us what economic impact containment can have.
China’s growth has been export-led, as the graph below shows. The Chinese Communist Party (CCP) has been emphasising home consumption to break the country’s reliance on exports and continue its economic growth. While this has led exports’ share of the country’s output to decline, consumers have been unable to make up for exports’ slower growth and the overall rate of growth of GDP has fallen.
In economic stimuli to counteract the impact of the pandemic, the CCP has continued to emphasise boosting domestic demand, earmarking 4 per cent of GDP for its fiscal stimulus package launched in May. As a percentage of output, this was small by comparison to similar measures in Germany, the USA or Japan yet the latest bounce-back seems to show the success of the measures taken.
By comparison, overseas demand growth has not been able to recover as quickly. International demand is outside of CCP control. Economic measures taken by other countries have had the same aims as those in China, but attempt to coax behaviour rather than direct it.
In the UK, innovative ideas such as enticing people to eat in restaurants by subsidising meals have worked, tempting consumers to spend. People have to eat; they want to socialise, and if someone else is picking up part of the tab, it is a sensible decision to eat out.
By comparison, the same amount of stimulus will not have the immediacy or direct feed into consumption if it was to subsidise a mobile phone or car. Both those products would lead to higher UK imports, and could in part trickle down into China exports.
Generally, countries’ emphasis on boosting internal demand has worked for goods for immediate consumption, but has it pushed consumer demand for more durable goods? China exports little food to Europe, but does send other goods, including masks, gowns and medical disposables. An initial look at a relevant index would seem to indicate that freight to Europe from China is down. You can see this by the decline in the relevant freight rate quotations index.
The indices are quotation-based and compare to a range of 1804 to 1847 for the same months in 2010 around the financial crisis. What these indices don’t tell is what executives in the industry see, which is much more revealing.
“Demand is keeping ships out of China very full, with carriers able to charge premiums to prevent shipments from being rolled, even as capacity is nearly back to normal” said Ethan Buchman, CMO, Freightos Group in a conversation with The Loadstar.
This was a comment made while being interviewed about the container port at Felixstowe. Here, problems with a new freight management system plus high volumes have led to a bar on the return of empty containers for export by rail into Felixstowe.
Further afield, anecdotal evidence such as increasing freight rates into US western ports would seem to cut through the noise. “The Shanghai Containerized Freight Index recorded a $53 increase on the spot rate for the US west coast, to a new record of $3,867 per 40ft, a staggering 189 per cent above the same week of last year.” This confirms that exports from China are increasing and there are indicators that their recovery is real.
Unlike China, UK recovery depends on individuals, free to make their own decisions. Our recovery will only be possible when people are confident. Confident to spend, not just on a subsidised meal or a DIY project, but on cars and new houses. It is hard to imagine that this will happen quickly in the UK. Such spending confidence will not return until many more people are confident of returning to work. Here, looking at China doesn’t help us.
The UK furlough scheme is coming to an end and we will see more clearly, both the damage that the measures taken to fight the virus have wrought and the full extent of the structural changes in the way we work and play.
No one can accurately predict the future, but the scope of the potential problem has been aired—three million unemployed. Add to this, the current end to stamp duty reduction in March next year; UK banks drawing in their horns on mortgage lending, and the potentially permanent diminution in the value of shops and offices, then the climb back to pre-Covid levels of activity looks steep.
Consumer behaviour has changed and the challenge will be to adapt quickly. Watching Sweden and China is not as instructive as people would think.