The Sunday Times December 19, 2021 11BUSINESS
I
t is the best of times, it is the worst
of times in the American economy —
to open on an original note. The
economy is booming in this best of
times. The unemployment rate is
low and falling, about 10 million
jobs await workers, wages are rising
and consumers are spending (up
18.2 per cent on last November).
Christmas is upon us and the delivery
services are maintaining the flow of toys
and other stuff from warehouses to
stockings. An estimated 109.5 million
Americans are preparing to travel over
the holiday period, notwithstanding the
outbreak of a new Covid variant, which
booster jabs seem able to repel.
The nation remains angrily divided in
this worst of times. Democrats in
Congress are filing criminal charges
against leading Trumpkins, including
the leader of the Republican party in the
House of Representatives, and
Republicans are preparing to support
candidates in the 2022 mid-term
elections who back Trump’s plan to run
in 2024 for what he calls his third term.
Workers are unhappy in their jobs
and, in what is called the “Great
Resignation”, huge numbers are
advising their bosses to take their jobs
and, well, look for applicants. Others are
refusing to come to the office on a
regular basis — in New York City, only
8 per cent of workers show up five days a
week despite a city-wide 9.4 per cent
unemployment rate that should make
them attentive to employers’ wishes.
Many consumers will do without
goods they ordered from Asia, as the
number of ships waiting for West Coast
berths continues to grow. Crime is on
the rise, with murder rates soaring and
large gangs looting swanky shops, while
fierce debates rage in many cities over
whether to defund or refund the police.
Culture wars over religion, abortion,
racism and masking/vaccination
mandates have Americans on edge — as
millions happily head for family
gatherings to consume pricier-than-ever
hams and turkeys. Optimism rears its
lovely American head.
Most of all, on the “worst of times”
side of the national ledger, we have
inflation — the silent thief that is robbing
workers of their wage increases and
forcing heads of households to prowl the
supermarket aisles in search of cheaper
substitutes for the goods they would
usually buy.
Inflation is rising at its fastest rate in
39 years. The consumer price index rose
by 6.8 per cent in November from the
same month a year ago — the sixth
straight month in which it climbed faster
than 5 per cent. The producer price
index, which measures wholesale
prices, rose 9.6 per cent last month — the
largest gain on record — presaging future
jumps at the retail level.
This is among the most important
factors driving down Joe Biden’s
popularity ratings; only 44 per cent of
Americans approve of the way he is
doing his job; 50 per cent disapprove.
The president continues to press for
passage of his Build Back Better (BBB)
plan to move America into line with the
welfare states of Europe’s social
democracies. He puts the cost at
$1.75 trillion over the ten-year budgetperiod, denies he would be tossing
petrol onto the inflation fires by passing
BBB, and says it will not add to the
deficit. But, for the budget period, Biden
is including only the early-year costs of
programmes that will certainly be
renewed when they expire.
The Congressional Budget Office —
which, when vice-president, Biden had
called the “gold standard” for deficit
estimates — isn’t buying the application
of that bit of legerdemain to the nation’s
ledgers. It reckons that BBB will add
$3 trillion to the country’s deficit over
the ten-year period.
Larry Summers served as treasury
secretary to Bill Clinton and is an adviser
who warned the Biden team of
impending inflation. He says: “The idea
that inflation will revert soon to levels
anywhere near the Fed’s [2 per cent]Irwin Stelzer American Account
target looks like a long shot.” The plan
laid out by Federal Reserve chairman Jay
Powell last week will do little to shorten
those odds. In the jargon of the trade, it
leaves the Fed “behind the curve” in its
efforts to contain inflation.
The Fed will not halt asset purchases
that keep interest rates low but instead
continue those purchases, although
“tapering” them by $30 billion monthly
rather than the $15 billion announced
earlier. That will bring the purchases to
an end in March instead of June. Yawn.
The Fed’s policy team also talked the
talk about raising interest rates to fight
inflation, but it did not walk the walk.
Twelve of its 18 monetary policymakers
expect three interest rate increases next
year, taking its benchmark rate to
0.9 per cent — negative in real terms.
That, say the Fed’s forecasters, will drive
down the current inflation rate (using
the Fed’s preferred measure) of 5.3 per
cent to 2.6 per cent next year.
Powell & Co seem to believe that tiny
interest rate increases can contain
inflation in an economy growing at 4 per
cent, with low unemployment (3.5 per
cent) and still beset by bottlenecks.
“Nice work if you can get it,” to
borrow from the lyricist Ira Gershwin.
But, as he added: “If you get it, won’t you
tell me how?”
[email protected]Irwin Stelzer is a business adviserThe idea inflation
will revert soon to
anywhere near 2%
looks a long shot
I
t never rains but it pours. Just as we
are trying to get to grips with the
Omicron variant, along comes
inflation. We knew we were
experiencing an inflation shock but
the latest figures — consumer price
inflation at 5.1 per cent and retail
price inflation at 7.1 per cent — were
a shocker. “Not now, inflation,” was a
reasonable response when there was
already so much bad news around.
I have hesitated to use the word
“stagflation” because it is an insult to the
great stagflations of the past, some of
which had inflation at more than 20 per
cent — alongside recession.
But this upsurge in inflation has come
when growth was stagnating even before
Omicron. If the cap fits, we should at
least acknowledge we have a touch of
mini-stagflation, despite the strong
labour market and retail sales data.
It was into this environment that the
Bank of England raised interest rates on
Thursday, from a record low 0.1 per cent
to 0.25 per cent. Until the release of the
inflation data, most people would have
regarded even this modest rise as a non-
starter because of Omicron. But to be
fair to the Bank, it stuck to its guidance
in November, which was that if the
labour market held up well after the end
of the furlough scheme on September
30, it would raise rates. The inflation
figures, embarrassing for a central bank
with the job of keeping inflation at 2 per
cent, tipped the balance.
Being fair to the Bank only goes so far.
Though some of us have urged it to
tighten policy for many months, initially
by reining back the quantitative easing
(QE) programme and more recently by
raising rates, this was not a great time to
start. The country is reeling under the
Omicron wave and the latest data,
notably the purchasing managers’
survey, shows a sharp weakening of the
service sector this month, for
understandable reasons. Many
businesses will see this as a kick in the
teeth on top of the other pressures they
face. As well as “not now, inflation”, they
would say “not now, interest rates”.
When the rise was announced, which
the Bank says will not prevent inflation
averaging 5 per cent over the winter and
hitting 6 per cent in spring, it brought to
mind a famous comedy routine.
This was a Beyond the Fringe sketch —
younger readers, look it up — in which
Peter Cook, a senior RAF officer, tells
Jonathan Miller, his junior, to “pop over
to Bremen” on a suicide mission,
because the war isn’t going well “and we
need a futile gesture”.
The Bank would say that while the
war on inflation has not been going well,
its gesture was not futile. By raising rates
at a difficult time, it may have won back a
little hawkish credibility. It is the first
major central bank to do so. Last week’s
rise, moreover, should be seen as the
first in a sequence, which could involve
several more. The Bank was behind the
curve and this was a bit of a catch-up.
Covid is the big uncertainty. The Bank
was briefed by Professor Chris Whitty,
the government’s chief medical adviser.
Economists are not epidemiologists and
some who have tried to model the
course of the virus have fallen flat on
their faces in a spectacular manner.Last week’s rise
should be seen as
the first in a
sequence with
more to come
Mind you, epidemiologists have not
always covered themselves in glory.
Faced with the uncertainty of the
moment, economists are resorting to a
familiar tool: scenario planning.
Continuum Economics, an independent
macroeconomics and financial markets
research firm, has devised four such
scenarios. They apply to the world
economy but can be easily adapted for
the UK.
Under the first, Omicron has higher
transmission but is similar in severity to
Delta. Countries impose further
restrictions and lockdowns; people shift
consumption back to goods and away
from services such as hospitality.
Growth is adversely affected in the first
half of next year, but then picks up. The
inflation impact is mixed: stronger in
goods but weaker in services. The firm
puts a 40 per cent probability on this.
At the other end of the scale, also with
a 40 per cent probability, is thatOn most projections, however, the
growth effects of continuing Covid
appear to be quite modest. This is
because, as we saw with the three UK
lockdowns (so far), their effect
diminishes. The Bank picked up on this
in its latest minutes, noting: “The
experience since March 2020 suggested
that successive waves of Covid appeared
to have had less impact on GDP,
although there was uncertainty around
the extent to which that would prove to
be the case on this occasion.”
If the growth effects are modest, that
adds to the fear that inflation will be a
problem for longer and raises the
question of whether the Bank’s actions
will impact on some of the structural
factors creating it, including supply
chain problems and labour shortages. I
suggested a couple of weeks ago that the
Bank might be a bystander in the
inflation process. It has elbowed its way
in. Mainly, however, if inflation falls, it
will be due to factors outside its control.PS
It is quiz time, and this one respects
social distancing. First, a public service
announcement. Normally over
Christmas I do my annual forecasting
league table, which ruins the festivities
for some. But I have decided to postpone
it for a couple of weeks into January.
Now, on with the quiz, put together
with my team of helpers.
Q1 2020 was a bad year for the economy.
But was it the worst since (a) 2009;
(b) the Great Frost of 1709; (c) 1921?
Q2 Forecasters say the UK economy will
have grown by about 6.9 per cent in- Will this be the best since (a) the
1988 Lawson boom; (b) the 1973 Barber
boom; (c) 1941, in World War Two?
Q3 Staying with growth, the government
says the UK is the fastest growing
economy in the G7, but if we take GDP
over 2020 and 2021 together, since late
2019, where does the UK fall in the G7
ranking? a) 1st; b) 3rd; c) 5th; d) 7th?
Q4 Rishi Sunak raised corporation tax in
March. Who was the last chancellor to
do so? (a) Gordon Brown; (b) Kenneth
Clarke; (c) Denis Healey?
Q5 There has never been a female
chancellor but two women have served
as shadow chancellor. Who are they?
Q6 Supply shortages, particularly of
microchips, have hit the car industry.
But how many chips are in a modern
car? (a) 20; (b) 100; (c) more than 1,000?
Q7 Staying with motoring, which, on
official figures, has gone up most in price
over the past 12 months? Is it (a) petrol
and diesel; (b) second-hand cars?
Q8 To the nearest £10 billion, how much
did the government spend on the
furlough and self-employment income
support schemes combined? a) £30bn;
b) £70bn; c) £100bn; d) £130bn?
Q9 The Bank of England raised Bank
rate from a record low of 0.1 per cent last
week. What was the highest-ever rate?
Q10 You probably rarely see one but
who is on the back of the new £50 note?
Answers by close of play on Sunday,
January 2 please, with signed copies of
the new edition of Free Lunch for three
winners. As a tiebreaker, either a joke or
a pithy description of the situation we
are in as we prepare to enter 2022.
[email protected]
Omicron has higher transmission but its
symptoms are milder and vaccine
effectiveness is not seriously
compromised. There is a modest effect
on growth in the next few months, but a
bigger inflation risk. Growth does not
slow enough to bear down on inflation
and there is a greater danger of second-
round effects, in which higher inflation
feeds through into wage settlements.
There are two other scenarios. One,
with a 15 per cent probability, occurs
when fast-spreading Omicron seriously
reduces vaccine effectiveness. Growth
takes a bigger hit, and this takes some of
the steam out of inflation.
The final scenario, with only a 5 per
cent probability, is Omicron turning out
to be a damp squib, less transmissible
and less severe than Delta. The growth
and inflation effects are marginal. (We
may already be able to reject the idea
that Omicron is less transmissible.)
People and businesses will have their
own ideas about the path of the virus
and whether Boris Johnson could
introduce new restrictions, even if he
wanted to. It could be too that the
changes in behaviour we have seen in
response to Omicron will fade and that
people, taking precautions, decide it is a
risk we have to live with. Omicron delays
the return to normality but does not take
us back to square one.
There are, nevertheless, some striking
things about all this. Never before has a
single issue, Covid, dominated the
outlook as it does now. The uncertainty
seems greater than this time last year.... AND THERE’S MORE IN THE PIPELINE
Source: ONSInput prices Output pricesSource: Producer price inflation, ONS130 index 2015=10090120100110INFLATION HAS SURGED TO A 10-YEAR HIGH ...
Consumer prices index, annual change-1012435%2010 2011 2012 20132014 20152016 2017 2018 2019 2020 2021Nov 2011 Nov 2013 Nov 2015 Nov 2017 Nov 2019 Nov 202Official target5.1%
David Smith Economic Outlook
It’s boom time but
everyone is angry
Awful timing from the Bank —
let’s hope it’s no futile gesture
Sports’ executive chairman, Peter
Cowgill, has agreed to join the ICS as a
special adviser. For some reason,
Cowgill, 68, insisted that all talks over his
possible appointment be held in a car
park just off the M66. His secretary
clarified that this was because his
preferred café nearby was closed due to
a Covid outbreak, although this did not
quite explain why we had to sit in his
Mercedes with the windows wound up.
However, Cowgill has already made an
impact. He advised me that we should
on no account appoint an independent
chairman, and that if the ICS annual
report were to suggest we might be in
the process of finding one, I should issue
a press release contradicting it. This
struck me as eminently sensible.
Last year we switched auditors from
Grant Thornton to EY, on the back of the
latter’s sterling work with Wirecard. I
think we can all agree that Grant
Thornton has had a superb year and
deserves to be rehired. Its accountants
have spent most of their first few weeks
trying and failing to count the number of
cakes in the ICS café.
A word on politics. Boris Johnson’sgovernment is obviously a complete
shambles, but we will refrain from
saying so lest we jeopardise our future
chances of a knighthood. Instead, we
will link everything we do to the
levelling-up agenda, no matter how
tenuous the connection. To underscore
the seriousness of our commitment, we
have hired our first-ever employee from
outside the M25. Thankfully, she comes
from Cheshire and was privately
educated. I feel she will be a good fit.
Finally, we must shoehorn in a pledge
to become net zero by the time my
successor’s successor retires. Fresh from
working on a similar project with the
Canadian property giant Brookfield,
former Bank of England governor Mark
Carney has advised that we can reduce
our carbon emissions simply by closing
our eyes and not counting whenever we
take flights. This came as a considerable
relief and means we are well on track.
With that, I would like to wish you a
merry Christmas. We must hope that
Omicron recedes in time for the most
important event in the business calendar
for ending global inequality — Davos.
[email protected]those who attended the meeting did so
only for the prawn sandwiches.
I take this as evidence of the thriving
community within the ICS and look
forward to persuading loyal members
that next year’s probable fire-sale to a
rival society was the plan all along. We
are grateful to Morrisons’ Andy
Higginson, chairman of our deals
council, for his advice. “Flog it to anyone
at any price, provided it isn’t Sir Terry
Leahy,” were his sage words.
The vitality of the London stockD
ear member, I write to you
after a highly eventful year for
the Ineffectual Chairmen’s
Society (ICS), the standard-
bearer for boardroom self-
aggrandisement and waffle.
2021 is ending as it began, in
a fog of Covid infections that
should provide a useful smokescreen for
corporate underperformance. I would
like to offer my sincere thanks to our
outgoing president, Baroness (Dido)
Harding, who has done so much to guide
our organisation through these
turbulent times. We must hope that she
reprises her NHS Test and Trace success
with a new government role in 2022 —
perhaps ordering billions of pounds’
worth of lateral flow tests that are
incapable of detecting the coronavirus.
I am pleased to say that she will be
succeeded by Matt Moulding, founder of
The Hut Group (THG), the executive
ATM with an online beauty retailer
attached. In keeping with governance
best practice, Moulding, 49, has also
become our landlord in a transaction
funded by the local council. He has
informed me that he will perform hispresidential duties while lying in a
starfish position on a large pile of
shareholders’ cash. I am told this helps
him maintain equanimity when analysts
have the temerity to question his genius.
Mergers and acquisitions have been a
defining theme this year. In January, the
ICS board decided that our declining
financial strength meant we would need
to seek a strategic partner. Over a game
of spin the bottle after a boozy dinner,
we settled on the American private
equity firm Bain Capital, entirely
unknown to our members. Some
expressed surprise when it was
explained that their rewards for voting in
favour of the takeover would amount to
a warm glass of wine and a hearty pat on
the back. To dispel any ridiculous
notions that Bain’s offer to pay me
millions of pounds after the transaction
might constitute a conflict of interests, I
put on my finest red trousers and
harrumphed my way around broadcast
studios refusing to comment. After such
a comprehensive PR campaign, I was
astonished and disappointed when
members voted the deal down. It later
transpired that some 50 per cent ofmarket has been another theme in 2021.
THG’s successful destruction of 75 per
cent of its market value, along with
Deliveroo’s float debacle, have cemented
our board’s opinion that golden shares
are key to reinvigorating the outmoded
bourse. We salute Lord ( Jonathan) Hill’s
listings review as an exemplary piece of
late-cycle bandwagon hopping and will
ourselves be jumping aboard by
rebranding our organisation ICS.com. I
will personally be rebranded as Olvr Shh
to make me as “digitally enabled” as the
imploding Scottish fund manager abrdn.
By making some flaky bolt-on
acquisitions in zeitgeisty areas such as
artificial intelligence, we are confident
we will be able to increase our earnings
multiple and prepare ourselves for a
stock market listing if a trade sale falls
through. As part of any float, we will of
course look to appoint a figurehead
chairman without any understanding of
tech. Fortunately, I am told that David
Cameron has recently become available.
None of these advances shall come at
the expense of corporate governance. It
gives me great pleasure to announce that
a renowned expert in this field, JDOliver Shah
An announcement on net zero from
the Ineffectual Chairmen’s Society