Retail will bounce back after a rocky 2011-12. But look out for employment issues, currency warfare and a squeeze on consumer credit ahead, says David Stevenson
The sun has been out, the holidays are in full swing and suddenly everyone is beginning to feel a teensy bit more optimistic about the world. Exactly the right time to do what all financial journalists love doing: putting the jeepers up our readers.
But one big caveat before I do. Unlike many commentators circling around the confines of the square mile, I have a much more optimistic view about the remainder of 2011 and 2012. The high street is and will continue to be a veritable bloodbath for the remainder of this year, but the UK will probably pick up quite aggressively towards 2012 as consumers retreat from their spending strike and start borrowing again. And at a global level the recovery is exactly what we’d expect from a business cycle after a very nasty shock to the system. i.e. a halting but firm comeback.
So with all those positive vibes out of the way, what are the big concerns preying on collective minds of the City and Wall Street, and how will they affect the travel sector?
For starters, the current obsession with inflation will begin to fade away as we move through 2011 and 2012, undermining the panic about a sudden hike in interest rates. The revolutionary idea circulating around the financial community is that interest rates might remain a lot lower than we expect for a great deal longer, if only to boost job growth. While most bond investors pooh-pooh the idea of another round of quantitative easing I’d be rather more cautious about making that bet. Remember that 2012 is an election year in the USA and President Obama and the Federal Reserve are desperate to show that new jobs are being created.
I also think this will become a major national obsession in the UK in 2012 as the government tries to talk less about cuts and more about growth. The good news is that this emphasis on jobs comes as the world economy recovers, but there’s also a bigger dose of bad news circulating – the jobs markets in the UK is looking very anaemic, with rising levels of long-term employment. We can’t create jobs out of nowhere by building yet more out-of-town shopping centres and the service sector still looks very weak, so the obvious jobs creators are unlikely to be the heroes this time around. There will be jobs aplenty for skilled workers but there’s already glaring shortages in most sectors.
The other bit of bad news is that consumer credit creation is likely to remain very subdued for many years to come. All the big banks have to cut back their consumer-focused balance sheets and are getting much better at using intelligent IT systems to operate a selective rationing system. The days of pushing big holiday bills onto credit cards will soon be long gone, unless you have a history of paying back your debts. The credit cycle is still blocked and will remain weak for many years to come.
The next scary thought is that Greece will almost certainly default on its debts in one way or another. Ireland and Portugal may follow it down this grim path, but every bond investor knows that the current level of debt in Greece is simply unsustainable. More to the point its government simply cannot keep cutting back spending and also kickstart the local economy – the Hellenic national will to change habits and behaviours is simply not there.
On paper this should be horrible news for the euro, which could plummet against both sterling and the dollar. But any form of default would almost certainly intensify German and French moves to speed up the integration of the Eurozone, with some fairly strict Teutonic governance run from the core.
That could strengthen the currency, and the fortunes of the dollar and sterling could do likewise – both will need to weaken much further over the next year or so. We’re entering a deadly phase of governments using currencies to fight trade wars and as a weapon to reflate their economies. The UK authorities allowed the pound to weaken early in 2010 but I think the government might try and use sustained low interest rates as another weapon to push the pound even lower.
The US government also desperately needs to push the dollar lower as a back door mechanism for strengthening the US export sector (and thus boosting jobs growth) and as a way of punishing all those upstart emerging markets (although China with its ‘fixed remnimbi’ rate will resist.) That quiet attempt to weaken the dollar also carries with it a very big risk: a lenders’ strike and a dollar run. There’s a great deal of smart money betting that Uncle Sam simply cannot afford to pay his debts and is fundamentally bankrupt. Personally I think the chances of a dollar collapse are fairly low but the legion of dollar bears is growing by the day.
This bearish scenario goes hand in hand with an even bigger worry, namely that when the monetary easing and low interest rates are withdrawn, there’ll be another almighty financial crash, probably in 2013 and 2014. The big Anglo Saxon banks have all been bankrolled by their governments and will probably survive, but the next wave of pain will engulf many European and Asian banks, kicking off another huge financial crisis.
I think fears of another massive financial crash are massively overstated, but there’s a great deal of smart money betting on really nasty stuff happening within the next two or three years. I’d be far more worried by another idea gaining ground – that big corporations have been spending unprecedented profits not on new capex or jobs but on senior management salaries. The worry here is that corporate profits as a share of gross domestic product is at an all-time high, while labour – wages to you and I – has spent the last few decades suffering in silence.
Many analysts think that profits can’t keep on growing without a major backlash from the workforce – come any pickup in the economy, unions in particular will be keen for labour to disproportionately benefit from growth. Expect a massive upsurge in labour disputes and an increasingly jittery middle class worried by their ebbing fortunes.
There is one last piece of more immediate good news to finish with: worries about rocketing oil prices are unlikely to be realised. North Africa is clearly set for more political strife – watch out for more trouble in Egypt – and it is possible that oil prices could spike back up for a short while but this is unlikely to last too long. A growing number of commodity fund managers now think that oil prices will begin to subside and stabilise around $100 a barrel.