The Sunday Times June 5, 2022 9
BUSINESS
T
his is the week that was. The
Fed belatedly said goodbye QE,
hello QT. Instead of purchasing
asset-backed securities to keep
their prices up, and therefore
interest rates down
(quantitative easing), the Fed
will be reducing its stash of
those securities (quantitative tightening).
It will shrink its balance sheet, bloated by
more than $4.5 trillion of these assets
purchased since the pandemic dropped
in from China, at $95 billion a month.
The Fed never could demand, “Give
us the tools and we will do the job”. This
tool has been rusting in its kit while it
waited for “transitory” inflation to cure
itself. Clearly, it is too soon to expect this
new activism to loosen what Powell calls
the “unhealthily” tight job market,
preferably without provoking a
recession, or at least not a deep,
prolonged setback.
The much-anticipated Friday jobs
report tells us little about the inflation
fight. The economy added 390,000 jobs
in May, a tad below the recent run of
400,000 monthly job additions.
Whether that is because job creation is
slowing, as the Fed hopes, or because
employers could not entice enough
workers to rejoin the workforce in
response to the 5.2 per cent increase in
average hourly earnings, is uncertain.
Look instead to revealing anecdotes:
lMany companies (Netflix, Peloton,
Wells Fargo, Coinbase, Tesla) announce
lay-offs or hiring freezes, suggesting
wage increases will slow. But 11.4 million
job openings remain unfilled, and
exceed job hunters by 5.46 million,
while applications for jobless aid fall.
lA substantial rise in mortgage rates
ends frantic bidding for houses, causing
a drop in home sales, and a 52 per cent
fall in lumber prices from their high
early in March. But house prices in
major metropolitan areas rose 20.6 per
cent in the year that ended in March.
lLast month, regional Feds in New
York, Richmond, Chicago and
Philadelphia reported falls in economic
activity. But the economy grew for the
24th consecutive month, with new
orders, production and backlogs
increasing, but at a slightly reduced rate.
lConsumer sentiment is at a three-
month low. But unhappy Americans —
two in three think the country is headed
in the wrong direction — are jetting,
dining, filling theme parks and
scrambling for scarce tickets to see “Top
Gun: Maverick” in cinemas despite a
nationwide shortage of popcorn.
There’s more, but you get the idea.
Deciding whether there are early signs
that Powell & Co are on the right track, is
a problem that, to borrow from Tevye,
the poor milkman in “Fiddler on the
Roof ”, would “cross a rabbi’s eyes”. Best
to look for guidance to the men in the
trenches, rather than the policy wonks
staring at their computer screens or the
intestines of their favourite fowl.
The broad consensus of polls and
businessmen with whom I speak can be
summarised as follows. “Business now is
good, so good that I can’t meet demand.
I can’t find enough workers (restaurants
in tourist areas are operating for limited
hours because of staff shortages),
enough airline seats (thousands ofoverbooked flights), enough hotel rooms
(no room at the inn for some customers
with reservations), enough lifeguards
(less than half the public pools are
opening in desert-hot Phoenix). But I
expect things to worsen by next year and
am planning for a recession that will be
mild and short-lived.” In the case of
Ford, that means the announcement of a
4.5 per cent decline in vehicle sales in
May, while investing $3.7 billion and
hiring 6,200 American workers to
position itself for longer-term growth.
Enter Jamie Dimon at a meeting of
analysts and investors. “Right now, it’s
kind of sunny, things are doing fine.
Everyone thinks the Fed can handle it...
I’ve said there are storm clouds [that
may disappear] but I’m going to change
it — it’s a hurricane ... down the road
coming our way. You’d better braceIrwin Stelzer American Account
yourself. JPMorgan is bracing ourselves
and we’re going to be very conservative
with our balance sheets.” This, only a
week after the bank’s chief financial
officer said he expects credit losses to
remain abnormally low through 2023.
The newly minted meteorologist has one
of the largest megaphones when it
comes to the economy.
Another business executive cum
influencer, Elon Musk, chimed in with “a
super bad feeling” about the economy,
and announced Tesla will shed 10 per
cent of its 100,000 staff, including those
who return to work.
Brian Moynihan, chairman of Bank of
America, took the podium at the same
meeting to rebut Dimon’s warning with a
recital of the strength of consumers,
who account for about two-thirds of
total US GDP. The account balances of
his bank’s customers have risen in the
past year, even though government relief
cheques no longer go into the accounts,
and their credit card balances are down
from $100 billion to $80 billion, adding
to their purchasing power.
Goldman Sachs chief economist Jan
Hatzius sees “signs of deceleration
consistent with what the Fed is trying to
achieve”. President Biden sees steady
growth ahead. Hatzius and Biden v
Dimon and Musk. Place your bets.
[email protected]Irwin Stelzer is a business adviserElon Musk says he
has a ‘super bad
feeling’ about
the economy
T
he big picture is important but
an economy is comprised of
many smaller parts — and for
the UK, those smaller parts are
its regions and nations. It is, of
course, possible to drill down
even further — to local level.
Staying with those regions
and nations, though, the Office for
National Statistics (ONS) has just
published some new figures. They are
not as up to date as the national figures,
but they tell an interesting story.
In the latest quarter for which figures
are available — the July-September
period of last year — the London
economy grew strongly, up by 2.3 per
cent, even as most other regions
stagnated or shrank.
In the Armageddon year of 2020,
when the economy overall recorded its
biggest slump since 1921, the smallest
annual falls were in London and the
southeast and the biggest was in the
northeast, followed by the West
Midlands.
The recession pushed London and the
southeast, unusually, into budget
deficits — normally, they are in surplus —
though these deficits were much smaller
than in other areas, particularly when
adjusted for population.
This is quite interesting because it
runs against the general perception,
which is that London was hardest hit by
the pandemic — hit by a plunge in
commuter numbers and a loss of city
centre activity. But London and the
southeast may have adapted more
quickly to working from home, and local
town centres appear to have thrived
even as the centre was struggling.
It is part of a longer-term pattern. If
we take the period since the financial
crisis, when people also thought that
London was badly wounded, its
economy, measured by gross value
added, grew by more than 35 per cent to
the end of last year, compared with just
1.4 per cent for the northeast.
Measured from another recent big
event, the EU referendum, it is notable
that three of the regions that voted most
heavily for Brexit — the West Midlands,
the East Midlands and the northeast —
had economies at the end of last year
that were smaller than at the time of the
vote. So was the northwest. Scotland,
which did not vote for Brexit, also had
lower output at the end of last year than
in 2016, though London was well up.
The West Midlands has suffered partly
because of the motor industry’s woes.
Globally, this sector is in trouble because
of supply-chain problems, especially for
microchips. But the UK appears to have
particular problems, and a battle is
under way over whether Jaguar Land
Rover will manufacture electric vehicles
in the UK or Slovakia.
A few years ago, the industry was
hopeful of surpassing the all-time record
for production, 1.92 million cars, which
was achieved as long ago as 1972. In
2016, the total was 1.7 million, but it has
been downhill pretty much all the way
since then, even before the pandemic.
The latest 12-month rolling total is just
752,612. Engine production is also weak,
down 19 per cent so far this year on last
year’s depressed levels — though, not to
overdo the gloom, commercial vehicleIf the House of
Lords really is
moved north, I’ll
eat my cloth cap
manufacturing is holding up better. The
West Midlands has always fascinated me,
and not just because I come from there.
Students of UK regional policy — which is
going through another iteration as we
speak, though with the “levelling up”
label attached to it — will know that there
was a time when parts of the UK were
regarded, for policy purposes, as too
successful. Regional policy actively
discouraged industrial development in
the southeast and the West Midlands.
Things have changed.
Indeed, with a nod towards the Jubilee
celebrations, regional changes during the
Queen’s 70-year reign have been striking.
I have firm figures only from 1966, but
the trend has been clear. If we take “the
South” as London and the southeast, the
southwest and what used to be called
East Anglia but is now Eastern England,
in 1966 these regions accounted for 44.7
per cent of UK gross domestic product.
By 1990, that share had increased, partly
reflecting the manufacturing devastationbecoming just another regional branch
office, as has happened with so many of
these civil service outposts in the past.
Otherwise, the government appears
to be as gimmicky now as when Lord
Hailsham, as Tory minister for the North
in the 1960s, donned a cloth cap for a
visit to the northeast. A whippet may not
have been available. The latest gimmick
is to suggest relocating the House of
Lords to Stoke, or York. If that happens, I
would be prepared to eat a cloth cap.
The government has got some things
right by promising a big increase in
infrastructure spending — though as a
forthcoming report from the Northern
Policy Foundation is expected to say, the
key will be turning those promises into
timely and efficient delivery.
There is also, and this is not a new
point from me, a pressing need for more
private sector businesses. Each of the
regions that make up the South have
more than 1,100 businesses per 10,000
of population, with London at 1,460.
Every other region has fewer than 1,000,
with the lowest in the northeast at 700,
Scotland, 752, and Wales, 796.
Businesses and government have to
work together if we are to reverse
decades of rising regional inequality. Not
wishing to spoil anybody’s weekend, the
omens are not good.PS
This being Jubilee weekend, a little
levity. I am pleased to welcome Stephen
Broadberry, professor of economic
history at Oxford University, with a joke
at the expense of economists. Any
complaints, don’t blame me.
A doctor, vicar and economist were
enjoying a round of golf, but got delayed
at the second hole where a man kept
failing to pot his ball, often missing
wildly. They started complaining to each
other and even shouting abuse at the
incompetent golfer. Eventually, the
clergyman went up and spoke to him.
When he returned, he said how he felt
very bad because the man was blind —
and as a clergyman, he should be
sympathetic and understanding towards
those less fortunate. The doctor said he
also felt bad, since he was committed to
helping people with a medical
condition. Finally, they asked the
economist for his opinion. He replied:
“It’s inefficient; he should play at night.”
Baroness (Ros) Altmann is a one-
woman joke machine, without whom
this slot would be sadly lacking. She has
some financial advice: “Never lend
money to a friend. It’s dangerous. It
could damage his memory.” And: “I’m
not normally one to brag about my
financial skills, but my credit card
company calls me almost every day to
inform me my balance is outstanding.”
There are more where those came
from, to be wheeled out in the coming
weeks, but Ros also provides the answer
to one of life’s mysteries: why are single
women thinner than married women? A
single woman comes home, sees what’s
in the fridge and just goes to bed. A
married woman comes home, sees
what’s in bed and just goes to the fridge!
Another regular, David Lewis, was
surfing and found conjunctivitis.com. It
is, he says, a site for sore eyes.
[email protected]of the 1980s, to 47.4 per cent. In the
intervening 30 years, it has gone up
again, to an extraordinary 54 per cent.
Given the trend, I would estimate it was
just over 40 per cent in 1952. These days,
London and the southeast alone are 38
per cent of GDP.
There is manufacturing in London
and the southeast, but it is part of a more
diversified economy. It is hard, indeed,
not to see the story of the UK’s regional
inequality, and the concentration of
economic activity in the South, as being
closely linked to the relative decline of
manufacturing industry.
In 1952, manufacturing accounted for
nearly 36 per cent of GDP and there
were whole regions, including the West
Midlands and the northeast, where
industry entirely dominated mainly
male employment. By the end of the
1980s, manufacturing’s share of GDP
was down to less than 20 per cent. Now
it is under 10 per cent and may be
heading for another downgrade. While
services are back above pre-pandemic
levels, manufacturing is yet to get there.
It is entirely right that the government
is trying to respond to the UK’s regional
inequalities, though its recent levelling-
up white paper was long on analysis and
nice graphics but thin on new ideas.
Rishi Sunak has been posting photos
of himself at the government’s new
Darlington Economic Campus, and I am
sure that those who work there will find
it rewarding to do so — not least if it
allows them to escape London house
prices. The challenge will be to stop thisRegional budget de icits 2020 21Cumulative growth in regional gross value-added, 2010 Q1 to 2021 Q4THE NORTH HAS HAD THE SLOWEST GROWTH ...
... AND THE MOST GOVERNMENT BORROWING
Source: ONSSource: ONSNorthwest
West Midlands
Scotland
Yorks and Humber
Southwest
Wales
East Midlands
Northeast
East of England
Northern Ireland
Southeast
London£49.9bn
£ 3 7.1 b n
£36bn
£32.8bn
£28.4bn
£25.9bn
£25bn
£21.3bn
£21bn
£18bn
£15.1bn
£ 7. 2 b nLondon
Wales
East of England
Southwest
West Midlands
Yorks and Humber
Scotland
Northwest
East Midlands
Southeast
Northern Ireland
Northeast35.2%
14.7%
14.4%
11.4%
10.2%
9.5%
9.2%
8.8%
8.6%
8.3%
4.5%
1.2%David Smith Economic Outlook
So, which expert
do you believe?
Northern lights have dimmed
as the South powers ahead
All aboard the transport bandwagon
For the first time since the Second World
War, car ownership has declined for two
consecutive years. This could be a blip —
supply-chain issues have meant you
would struggle to get a new Merc even if
you wanted one. But some company
bosses are drawing deeper conclusions.
As we report today, after studying the
car-buying data, Ikea is moving away
from opening new out-of-town
behemoth stores to building smaller
ones in city centres. Customers will get
to these shops by public transport and
order for home delivery.
This change is little short of seismic
for Ikea. It has built an empire on mass
car ownership, much as Facebook did
with smartphones. But the canny
Swedes worry about missing out on an
urban, green generation of younger
customers — people who don’t see the
point in learning to drive, let alone
owning a car big enough for a Billy
bookcase.
Private equity investors are also
betting on the no-car trend. Train and
bus companies have been on the
receiving end of a flurry of takeoverapproaches. Stagecoach and FirstGroup
in the UK have been bid for, and Britain’s
Basalt Infrastructure has bought Nobina
in the Nordics.
This may seem odd, given that Covid
lockdowns so recently brought the
transport sector to its knees. But private
equity — particularly long-term
infrastructure funds — sees a bright
future. You can see why: local councils,
fretting about pollution and congestion,
are pushing cars out of cities and state
investment in buses is resurgent.
Rail may not offer exciting returns
now that companies work under
contract for the Department for
Transport. But the new system ends the
boom-bust cycle of the old franchises
and offers a safe, annuity-style income
for years to come. That is appealing to
funds seeking dependable returns.
The whole sector is set for a wholesale
increase in its lowly stock market rating.
Schroders, the biggest investor in
FirstGroup, gets this and is opposing the
takeover bid. It’s right to. Long-suffering
shareholders must not sell out cheaply
to the private equity tycoons.
Oliver Shah is awayFor reasons still baffling the experts,
Britain seems to have had more people
quitting the workforce than comparable
countries. Before Brexit, it would have
been easier for employers to make up
the difference with EU workers.
Britain is, in short, undergoing a
shock to the supply side of its economy
that, as the pandemic retreats, appears
largely of Brexit’s making.
As a result, the pound is now trading
at a 16-month low against its peers on a
trade-weighted basis. Research fromC
hris White is doing a roaring
trade. The patriotic fervour
surrounding the Jubilee has
boosted sales for the chief
executive of England’s biggest
vineyard, Denbies Wine Estate.
But while his Surrey wine is
in demand, his ability to
produce it has been dealt a heavy blow
by Brexit. Even though he does not sell
to the EU, he relies on the established
French and German wine industries to
supply and service his equipment. And
due to Brexit red tape, some businesses
on the Continent will no longer deal with
him. Others — partly reflecting the
higher costs of doing business with
Britain — have put their prices up so
much that White can’t afford the new kit
that will help his enterprise grow.
So, rather than import the 5,000-litre
tanks he needs, he must hire smaller
ones in the UK on expensive short-term
contracts that will eat into his profits.
Meanwhile, delivery times from the EU
are now so unreliable that just-in-time
supplies of bottles and corks no longer
work. Instead, he buys the whole year’s
supply in one batch. That’s a cashflowheadache, and now he needs new sterile
warehouse space to store the bottles for
half the year when they are not needed.
This vignette of inefficiency is
repeated in small businesses up and
down the UK, and goes some way to
explaining why the pound is so much
weaker than comparable currencies.
A currency’s strength is, in large part,
a reflection of the market’s view on the
productivity and strength of the
economy behind it. And, since Brexit,
sterling has been valued at a discount to
its peers because the world’s investors
believe British enterprises will not be as
productive as they would have been.
Worryingly, despite a weak pound
making our goods cheap for foreign
buyers, exporters are still struggling.
First-quarter figures last week showed
exports of food and drink to the EU were
down 17 per cent, or £614 million, on
pre-Covid levels. Exports to non-EU
countries increased by 10.7 per cent, or
£223 million, but not enough to offset the
European decline.
And that is before we get to labour
shortages, which are also stopping
businesses trading to their full potential.Source: EikonBoE sterling exchange rate index2015 16 17 18 19 20 21 22969288848076
72Panmure Gordon — one of the less
hysterical Brexit bears — shows there are
more short-sellers lining up to bet
against it than at any point since August
2019, when Boris Johnson looked set to
crash us all into a no-deal Brexit. Fears of
a trade war over the Northern Ireland
Protocol are not helping.
Bank of America loudly declared last
week that the pound was beginning to
resemble a currency from an emerging
market — Brazil, say, or Kenya.
Hyperbolic, probably, but it is true
that sterling no longer behaves like the
hard currency it once was. When the US
Federal Reserve raises interest rates to
tame inflation, it does so against the
backdrop of a strong economy — so the
dollar rises, too. Since December, the
Bank of England has hiked rates four
times — but the pound has barely
reacted. This is largely because of the
world’s dim view of our bungled Brexit.
Partygate, policy drift, and the other
petty messes tangling up ministers who
took us out of the EU, should not make
us lose sight of that. Their mishandling
of Europe has hobbled wealth-creators,
as the sickly pound testifies.Jim Armitage
Sterling is in crisis and there’s no
sugar-coating the reason why