The chilling decline in market confidence, both in the UK and internationally, has been not just sudden but almost palpable. Dr Madsen Pirie of the Adam Smith Institute asks whether the disquieting economic news amounts to ‘the first pebbles of the avalanche’:
‘Businesses have closed, jobs lost, manufacturing down. High street sales have plunged, the housing market is flat, and bankruptcies are at record levels. Tables have shown Britain plunging down the league table of competitiveness. Economists are predicting slowdown, rising unemployment, and higher taxes. Businesses are preparing for retrenchment as the global economy cools. At present the bad news is coming one pebble at a time, but some analysts feel the ground tremble as though something bigger is on its way.’
Any reaction to the perceived threat of stagflation, if not something worse, from an institute that favours free markets, lower taxes and the trimming of regulation and government waste is unlikely to sit well with a third successive ‘New’ Labour government, but the evidence of slowdown is hardly restricted to the UK. As The Economist pointed out last week (‘Stagflation, the remix’), sluggish euro zone economies are looking ever more lethargic, and
‘(Directing monetary policy) is particularly hard in today’s unbalanced world economy, where too much depends on continued spending by American consumers who, in turn, are counting on an unsustainably frothy housing market. At some point, America’s heavily indebted consumers will need to cut back spending. And when that happens, those in the rest of the world will have to start spending more to keep the world economy growing. The real risk is that Washington’s central bankers will be too worried about stagnation and Frankfurt’s too worried about inflation to allow that to happen.’
What blurs the macro picture (and what certainly adds to subjective fears fuelled by the weight of speculation in the financial media) is the nature of a Chinese slowdown – if any, given the unreliability of Chinese official data. Indeed, China has gone in pretty short order for many market participants from being the relatively benign exporter of global disinflation to the primarily malign destructive agent hollowing out Western manufacturing capacity almost irrespective of the rate of its own economic growth. (The CBI suggests that UK manufacturing jobs are being lost at a rate of 7,000 a month.)
China’s ‘bogeyman’ status has been consolidated internationally by events as disparate as Lenovo’s purchase of IBM’s PC business and the failure of Britain’s MG Rover, along with general perceptions of China’s ‘responsibility’ for spikes in commodities and oil prices. As Bill Adlard recently wrote in The Business, two traditional ways for the West to attempt to prevent global (but China-inspired) deflation are likely to be politically unacceptable today: war and protectionism. Any sane reader would view the first mechanism as intolerable, but there has been no recent shortage of admittedly minor G7 skirmishing around the second – think in terms of the US over steel, or the US and Europe over Chinese textiles.
If the stability of global equity markets is now ultimately down to the wisdom of politicians rather than the more typical self-interest of businesspeople and investors, there are more reasons than normal to be concerned about future volatility amid a general climate of fear. (Elizabeth Becker for the New York Times quotes Senator Harry Reid of Nevada,the minority leader: ‘I don’t like Cafta’ (the Central American Free Trade Agreement, current centrepiece of Bush’s trade agenda) ‘I am not going to vote for it and I will do whatever I can to kill it. We are approaching a trillion-dollar trade deficit. We can’t survive as a viable, strong country doing that.’) Given the essentially unquantifiable nature of geopolitical risk, the rationale for favouring broadly defensive investments has been reinforced.
Tim PricSenior Investment StrategisAnsbacher & Co Ltd