The Sunday Times April 24, 2022 9
BUSINESS
I
n 1946, Congress, imbued with the
success of wartime planning,
decided that within ten days of
submitting his budget, the president
must submit an Economic Report of
the President. President Truman
complied with a document of some
54 pages. It told of an America that
has “never been so strong or so
prosperous”, yet fearful of “another
depression, the loss of our jobs, our
farms, our businesses”. Plus ça change...
Last week, Joe Biden submitted his
2022 Report, some 432 pages. He
congratulates himself for rescuing an
economy in dire straits with “nimble...
well-designed and well-administered
policies”. And his Council of Economic
Advisers announces the end of “the
retreat of the US public sector from its
complementary role vis-a-vis the private
sector in economic growth”. The era of
thinking that the era of big government
is over, is over.
The size of the report reflects the
policy ambitions of a Democratic Party
led by what these days is a centrist
president. Were the Democrats in
control of Congress with a handsome
majority, this would be America’s
Beveridge Report, a left-of-centre agenda
for moving the country further down the
road from market capitalism towards a
European-style welfare state. Or, in the
hands of a government with less need to
cater to a progressive wing, the basis for
a reform agenda to deal with the flaws in
America’s version of market capitalism.
Nowhere is this better demonstrated
than in the section dealing with the role
of trade unions in America. For decades
the share of private sector employees
who felt the need to belong to a trade
union has declined, from 16.8 per cent in
1983 to 6.1 per cent today. This has riled
a president who learnt at his father’s
knee that unions created the middle
class. Biden is often accused of being a
disciple of Claude Rains’ captain of
police in the film Casablanca. Reynaud,
asked about his political convictions,
candidly replied: “I have no conviction... I blow with... the prevailing wind.”
Biden is no Reynaud when it comes to
the importance of unions in making the
American dream a reality.
He arrives on the scene when the
labour market is changing. The horny-
handed sons of toil who shaped his and
his father’s view have been
supplemented by a new flock of potential
union members, younger workers with
computer-calloused fingers more likely
to take their lunch breaks in a salad bar.
They are eager to wrest control of
their working hours and their very lives
from their employers, and cannot be
soothed with the wage rises generated by
a market with 11 million job openings.
“Spoilt” in the view of grumpy oldsters,
who remember when jobs were scarce,
benefits meagre, and “take this job and
shove it” was not a viable strategy.
When this scribbler taught labour
economics, he pointed out that selling
labour was like selling “strawberries in
the sun”. Unsold fruit, like unsold hours,
could not be recovered. Which is why
unions were needed to correct the
imbalance of bargaining power between
workers and employers, the latter
benefiting from the presence of “a few
hungry men at the gates”. Fortunately,
the circumstances of the new pool of
potential union members does not find
itself in the dire circumstances of an
earlier generation living in a take-it-or-
leave job market in which they fought for
what the great Billie Holiday, in a
different connection, called “a few
crusts of bread and such”.
Amazon workers are unionising in
pursuit of better safety conditions and a
relaxation of productivity standards;
Starbucks workers, already receiving full
university tuition among other benefits,
believe unions can extract better working
conditions and less intense on-the-job
supervision; and retail workers in Apple’s
New York City store see union
membership as the way to move their
$20-an-hour wage to $30, while their
Atlanta counterparts seek pay and statusIrwin Stelzer American Account
comparable to employees at corporate
headquarters and “a clear way to grow”.
The president is on their side, willing
to do more than see that angry bosses
and union thugs do not rig elections in
which employees record their
preferences for and against union
membership. He has ordered that high-
wage, unionised firms be given
preference when government-funded
infrastructure contracts are awarded.
Buyers of Teslas and other EVs not
produced in unionised factories will be
denied subsidies ladled on customers of
unionised carmakers, penalising Elon
Musk, the major driver of innovation in
an industry dominated by risk-averse
giant corporations. More is to come from
implementation of 70 recommendations
of the president’s Task Force on Worker
Organizing and Empowerment.
In short, it is payback time. One of the
unions backing the Starbucks and Apple
dissidents spent more than $75 million
supporting Democratic candidates in the
2019-20 election cycle, nothing on
Republicans. To Biden’s convictions add
the experience of a politician who knows
who “brung him to the dance” and kept
him whirling around the floor for half a
century despite numerous mis-steps.
Many are the ways of honouring thy
father’s memory.
[email protected]Irwin Stelzer is a business adviserThey are eager to
wrest control of
their very lives
from employers
Rolling back trade
protectionism
would help. That
includes the UK
T
here was a time when no year
was complete without two
pilgrimages to Washington for
the annual meetings of the
International Monetary Fund
and World Bank — the “twins”
that owe their existence to the
Bretton Woods conference of
1944, the 80th anniversary of which we
will soon be marking.
The spring and autumn IMF/World
Bank meetings were where the world’s
financial movers and shakers got
together, and mainly still do — not just
finance ministers and central bankers
but also a huge private sector contingent.
These gatherings used to move
markets, particularly the smaller G7
meetings of finance ministers and
bankers, but it is a while since they have
done so. It means that a lot of the
interest is generated by the IMF’s view of
the world economy, with the latest one
being published a few days ago.
IMF forecasts are often mocked, as are
most economic forecasts. But there is no
document so comprehensive in its
analysis of the global economy as its
World Economic Outlook, published
twice a year, in April and October, with
updates in January and July.
The big stories in the IMF’s new
forecast are well known. Had the UK
government not made such a thing of its
“fastest growth in the G7” boast, I do not
suppose this aspect would have got as
much attention as it did.
But the new forecast shows that the
UK’s estimated growth of 3.7 per cent
this year is pipped by Canada and equal
to America. I pointed out last week that,
thanks to lockdown quirks, the UK can
get 3.7 per cent growth in 2022 even if
the economy flatlines for the rest of the
year. In 2023, with predicted growth of
1.2 per cent, the UK is at the bottom of
the G7 league. From hero to zero. Those
who live by the IMF sword die by it.
That, while embarrassing, was not the
big story. It was that, due to the war in
Ukraine, the global growth outlook has
deteriorated. In January the IMF
expected 4.4 per cent global growth this
year; now it is 3.6 per cent, a big revision.
The growth prediction for advanced
economies is down from 3.9 to 3.3 per
cent, and for emerging and developing
countries from 4.8 to 3.8 per cent.
Ukraine’s economy is predicted to
contract by 35 per cent this year and
Russia’s by 8.5 per cent. The impact on
the rest of the planet is “worldwide
spillovers through commodity markets,
trade and financial channels” — and
“even as the war reduces growth, it will
add to inflation”. Governments, after
spending heavily fighting the pandemic,
have limited room to spend on offsetting
these effects, according to the IMF. Rishi
Sunak would concur with that.
I do not want to focus today on the
UK’s fall from IMF grace, or the negative
economic impacts of Russia’s invasion.
What struck me most about this new set
of forecasts was how downbeat they are.
The IMF predicts out to 2027 and, when
the dust settles after all the pandemic
distortions, a muted picture it is.
We used to think of 4 per cent annual
growth for the world economy, on the
IMF’s measure, as something like the
norm. Now it is expected to settle downat about 3.3 per cent. From 1990 to the
mid-2000s, advanced economies grew
by an average of 2.7 per cent a year,
perhaps partly on a diet of unsustainable
finance. But advanced-economy growth
is now predicted to settle at 1.6 per cent a
year on average.
You do not need many years stuck at
this lower growth for the cumulative
effects to be significant. The world
economy has lost its mojo.
There are notable underperformers
among G7 economies, such as Italy and
Japan, which settle down to growth of no
better than 1 per cent in the medium
term, according to the IMF. The UK has
its own problems because of Brexit,
though the IMF’s projections have an
odd bounce in growth in 2025 for the
UK, which may be a reaction to the weak
growth of the previous two years. But
the slow-growth malaise is also expected
to affect America, settling at just 1.7 per
cent in the medium term.
These projections may be toonow, at best, a 5 per cent growth
economy. The IMF expects 4.4 per cent
this year and 5.1 per cent next. Part of
this is due to the resistance that China
now faces — including the Trump trade
barriers that have been retained by the
Biden administration — but much of it is
due to the internal contradictions of the
Chinese growth model and a surely futile
attempt to pursue a zero-Covid strategy.
India, which Boris Johnson has been
visiting, fares better and can sustain
growth of 7 or 8 per cent a year. But it is a
much smaller economy, and
instinctively protectionist.
We cannot easily turn back the clock
to a time of stronger global growth, but
that does not mean that nothing can be
done. Rolling back protectionism would
be a start. That includes this country,
which has increased trade barriers with
its biggest trading partner.PS
The jokes are slowly coming in, and I
nearly have enough to treat or punish
you, depending on preference. In the
meantime, something that is no joke.
One of my favourite economic series is
the GfK consumer confidence index,
continuously published since 1974.
On Friday, GfK announced consumer
confidence was in “freefall”, with the
index slumping seven points to -38 — the
all-time low of -39 was recorded in July
2008, during the financial crisis — in
other words more downbeat than at any
time during the pandemic.
People are gloomy about their own
personal finances, with an index score of
-26, and even more so about the
economy in general, where the reading
is -55. For all those world-beating boasts,
the reading for the economy over the
past 12 months is -60.
Joe Staton of GfK predicts further falls
in confidence in the months ahead as
what he describes as the “cost crunch”
bites. The “major purchases”
component of the index has also
slumped, suggesting this is not a great
time to be selling cars, sofas or huge TVs.
Having said that, there is that
£200 billion or so of “involuntary”
savings left over from the pandemic
waiting to be spent, on which a lot of
hopes are resting.
During my recent meanderings in the
warmer weather, I have noticed that
plenty of people still have enough spare
cash to be taking advantage of outdoor
hospitality. Maybe Netflix’s loss is a gain
for pubs and cafés.
What people are not doing, so much,
is spending in the shops. Retail sales fell
by a bigger than expected 1.4 per cent last
month, new figures show. There was a
7.9 per cent drop in online spending,
which official statisticians think is
explained by a drop in discretionary
spending. Online was one of the great
beneficiaries of the pandemic. People
have not been immune, either, to the
impact of record petrol and diesel prices.
The volume of road fuel sales dropped by
3.8 per cent last month, reflecting a
decline in non-essential travel.
Very weak consumer confidence is
not a great backdrop for the economy, or
for a government on the ropes on so
many levels. It may last for some time.
[email protected]downbeat, a bit like long-range weather
forecasts, though economists are better
at assessing medium and long-run
growth prospects than short-term shifts.
What is going on?
There are three factors at work here.
Global growth never got back properly
to previous levels after the global
financial crisis, which morphed into the
eurozone crisis. And if one crisis was
hard to take, two more — the pandemic
and the Russian invasion of Ukraine —
have made things worse.
We have yet to see the full impact of a
potential Russian default, which at one
time was enough to make financial
markets shudder. The global impact of
higher US interest rates, increased in
response to the inflation shock, could be
significant, particularly for emerging
market economies where there is talk of
a new crisis. A groggy world economy is
reeling under a series of blows.
Second, a particular weakness, since
the first of these crises, has been world
trade. Growth here, which during the
high watermark for globalisation in the
1990s and early 2000s was often double
the rate of global GDP, now struggles to
match it. Protectionism, favoured by
populist, nationalist politicians such as
Donald Trump, pared back globalisation
and has helped to make the world
poorer. No longer is world trade the
engine of growth it was.
Related to this is a third factor, the loss
of momentum from China. Having
grown by an average of nearly 10 per
cent a year since the late 1970s, China is... AS INFLATION BITES
Source: IMFSource: IMFTHE GLOBAL GROWTH OUTLOOK IS WEAKER ...
Global economy Advanced economies Emerging market and developing economiesConsumer price index Core consumer price index2021 2022 2023 2021 2022 2023 2021 2022 2023-202462017 2018 2019 2020 2021 2022Annual growth6.1%
3.6% 3.6%
5.2%
3.3%
2.4%6.8%
3.8%
4.4%
8% Advanced economiesDavid Smith Economic Outlook
Unions are poised
for payback time
A groggy global economy is
reeling from so many blows
value them, it could yet fall further. And
more popular companies are likely to be
punished heavily for disappointments.
“We saw this in 2000,” says freelance
analyst Steve Clapham. “Stocks fell 50
per cent and people went, ‘Oh, well,
they’re cheap now.’ And they halved
again. You can laugh, but a stock that
falls 90 per cent is a stock that’s fallen 80
per cent, then halved. These things can
halve and halve and halve again.”
With hindsight, Ackman was an idiot
to bet on Netflix in January. But he may
be wise to have cauterised the wound.Flashback to Mitie’s Prickly Peer
Fines for accounting firms come along
like London buses. But the £1.5 million
slapped on Deloitte by the Financial
Reporting Council (FRC) last week
caught the eye. It was for Deloitte’s
auditing of the outsourcer Mitie in 2016.
It revived memories of Baroness (Ruby)
McGregor-Smith, the “Prickly Peer” who
ran the cleaning and catering group for
almost a decade until resigning shortly
after a profit warning that autumn.
McGregor-Smith was entrepreneurial
and not a little abrasive. Revenues grewfrom £1.2 billion to £2.2 billion in her
time as chief executive, but there were
question marks over accounting. Two
City regulators opened investigations
after she left. The Financial Conduct
Authority closed its inquiry into the
2015-16 accounts. The FRC’s fine for
Deloitte relates to the treatment of
“goodwill”, the value of intangibles such
as intellectual property in acquisitions.
McGregor-Smith, now 59, is a
chartered accountant and was finance
director at Mitie before taking the top
job. You’d have thought she’d have been
across the numbers. But she wasn’t
named in the FRC release. Instead, she is
preparing to join the board of Canadian
services firm SNC-Lavalin — the latest in
a portfolio of non-executive posts.THG’s smoke and make-up mirrors
Wobbly online beauty retailer THG said
it had rejected “unacceptable” bid
approaches on Thursday. The buzz
covered up bad news on margins, but
some onlookers are convinced founder
Matt Moulding is also trying to flush out
a genuine takeover. Watch this space.
[email protected]hawkishness. While Bank of England
governor Andrew Bailey spoke last week
of “walking a tightrope” between
tackling inflation and avoiding
recession, US Federal Reserve chairman
Jay Powell told an IMF panel that a
0.5 percentage point increase was “on
the table” next month. Traders expect
the Fed’s policy rate to be 2.7 per cent by
the end of year, from 0.25 per cent now.
Worries over the cost of debt and the
magnified importance of medium-term
cashflows have cratered some bigP
erhaps Bill Ackman is a wise
idiot. The US hedge fund
tycoon sank $1.1 billion into
Netflix stock in January after a
sharp sell-off almost halved the
streaming giant’s market value,
saying that short-term
investors sometimes discarded
“great companies at prices that look
extraordinarily attractive when one has
a long-term horizon”.
Ackman’s time horizon turned out to
be precisely three months. His Pershing
Square fund bailed out of Netflix last
week, crystallising a $430 million loss,
after the company warned that it
expected to lose two million subscribers
in the second quarter. Its shares crashed
by almost 40 per cent. Ackman said he
had “lost confidence in our ability to
predict the company’s future prospects
with a sufficient degree of certainty”.
Several factors collided to muller
Netflix. The streaming leader has been
going stale, with series such as Ozark
and Stranger Things running out of
steam. Well-funded rivals such as Apple
TV+ and Disney+ are generating their
own hits and putting popular oldcontent behind paywalls — things like the
Marvel films at Disney+ and Star Trek
shows at Paramount+. With 221 million
global users, Netflix must be reaching
saturation point in some markets. And
with the cost of living rising, consumers
are whittling down their subscriptions.
Netflix is still adding customers, but not
as quickly as it is losing them.
The most striking thing about last
week’s events, though, was the severity
of the market’s reaction to the news that
one of America’s favourite growth
companies was no longer growing.
That has a lot to do with inflation and
the monetary backdrop. Expectations of
higher interest rates are changing
investors’ tastes. With the cost of money
going up, stocks promising to grow the
top line now and think about delivering
earnings in the distant future, such as
Netflix, are going out of fashion. Those
coming offer jam on a shorter timescale,
such as banks and oil majors. Witness
the 19 per cent fall in the tech-heavy
Nasdaq since the start of the year versus
the 0.2 per cent gain by the old-world
FTSE 100. America is emerging as the
world’s capital for central bankNet lix S&P 5001008060Source: Thomson Reuters Eikon40
Jan Feb Mar Aprgrowth stocks. Pandemic darlings such
as Robinhood (down 44 per cent year-to-
date) and Peloton (down 42 per cent)
have been crushed as these dynamics
have dovetailed with the fact that people
are allowed to leave the house again.
There is a bit of this with Netflix, too.
The more cash-generative ones, such
as Google parent Alphabet and Amazon,
have fared much less badly.
In the best analysis of how extreme
the bullishness had become towards
growth stocks before this recent rout, in
2020, the US hedge fund manager Cliff
Asness looked at the gap in valuations
with then out-of-favour value stocks. He
found that on almost every measure
(and even stripping out tech stocks), it
was at its widest level ever.
Netflix’s battering shows how much
hot air — or hope, if you want to be polite
— has been propping up some of these
valuations. After last week’s tumble, it is
on a market cap of $99 billion and a
price-to-earnings ratio of 20, down from
$300 billion and 60 last November. That
might sound reasonable, but with so
much uncertainty over future subscriber
numbers and the way the market willOliver Shah
Lights, camera, hiss: Netflix is the
deflating growth bubble in action