Quarterly Economic Update – Mar 2014

This commentary seeks to provide guidance over a 3 -5 year timescale.


Taking the three big economies of the Eurozone in turn:

The German economy is moving forward quite well, with low inflation and some reasonable growth figures, but is ever more reliant upon non-Eurozone exports. Growth over the last couple of decades has been partly due to the removal of the premium exchange rate attached to the Deutschemark when selling into the Eurozone. There is no growth and little activity in the Eurozone, so Germany has to look elsewhere – most notably east.
Eastern Europe, Germany’s major recent growth opportunity, is suffering from the fear created by the Russian take-over of Crimea and the fear that Putin’s ambitions don’t stop there.

Times are likely to remain difficult for Eastern Europe for some time. Germany will suffer a knock-on effect, but still will be the strongest economy in Europe. Growth of 1.5% seems likely.

President Hollande of France appears to be too busy with the women in his private life to pay much attention to the economy. High taxes, restrictive employment practices and ineffective government are not a recipe for great results. France may stay out of a technical recession, but not by much.

Matteo Renzi has taken over as PM of Italy with some good news to greet him; the country moved out of recession at the end of 2013. That’s been the longest recession post war. Renzi has real ambition to reform Italy’s sclerotic political and economic systems, with the suggestion that all the parliamentarians should vote for their removal. That reminds me of turkeys and Christmas….if he can drive through the returns, it will take a decade or more. Growth below 0.3% seems most likely.

Spain is starting to show some signs of recovery, but it is a long hard road. Youth unemployment remains very high and there are still some political scandals and rumours surfacing. Low growth, still subject to shocks.

Overall, there will be little growth in Europe. Political instability in North Africa and Eastern Europe will continue to be a distraction and drain on resources, but at least the worst of the Euro crisis seems to be over. It’s a stable economic environment now, one of the keys to attracting inward investment, and still a large chunk of the world’s economy.


The story in the UK is good news, with growth now established in almost all sectors. The real impact of cuts to public sector employment is yet to be reflected in the employment statistics, and there are still more scandals emerging in the financial services sector.

Private businesses are more optimistic than for many years, with two main constraints to growth, access to finance and access to well trained & qualified staff.

There’s a fundamental reform underway in the business finance market, with new entrants adopting a traditional model (Metro Bank, Aldermore, Virgin Money and many more) but perhaps more significantly the rise of crowd based funding, both for debt and equity. Debt based crowd funding is becoming really effective and simple to deploy.

Growth rates in the UK are likely to be 2.8% in 2014, rising to 3.5% in 2015. Interest rates are likely to rise from 0.5% to 0.75% in the first quarter of 2015, although that could take place in the last quarter of this year.

Increases in interest rate are more likely to be driven by fear of an asset price bubble, both in the stock market and in housing, than any fears of inflation. We may well see controls imposed on property lending to minimise that risk.


Political stalemate continues with President Obama unable to make major legislative changes; the shale gas revolution is the main driver of change in the economy. The low price of shale gas has enabled manufacturers to reverse their policies of outsourcing production to South America and the Far East.

There are no obvious negatives on the horizon and much good news, with the US as a whole likely to be a net exporter of gas in the near future.

The US is certainly the most successful of the developed economies with growth in 2014 of close to 3% and possibly 3.5% in 2015 and beyond.


The eyes of the world are turning to Brazil, drawn by the Wold Cup and the Olympics over the next few years, but IMF forecasts for growth in 2014 are still below 3%.
This is very much a story of unfulfilled potential, but until the infrastructure is in place and the social divides are narrowed it seems very likely to remain unfulfilled.


Everything is back in the melting pot; the Crimean annexation will result in significant isolation, the value of Russian oil is falling and the ability of the government to leverage their supply of natural resources for political gain is weakening (See US shale gas above)
GDP will probably fall in 2014 and flat-line at best in 2015. The real question is how quickly relations with the west return to normal. If the sanctions and isolation continue, recession in Russia is very likely.


There’s significant doubt that the long established political party, Congress, will maintain its influence under the latest scion of the Ghandi dynasty. The most likely winner is Narendra Modi of the BJP party, elected on a platform of economic reform. The challenge will be to reform a country and political system where a cabinet minister has just advised his supports to “vote twice” by washing the ink off their fingers and voting in a different district.
Growth rates of 4-6% in the forecast period.


The new leadership has settled in and consolidated its hold on power; some of the most obvious abuses of the financial and regulatory systems have been closed off, and recently the hard reality of market forces was allowed to play its part as a company defaulted on its debt for the first time.
Couple this with the reduced number of companies approved for IPO (flotation) and there are some signs of structural economic reform.
Overall, very positive with growth in the 7-9% ranges.

“Greater China”

I’m loosely defining this area as the countries surrounding China & supplying Chinese demand, from Vietnam and Thailand /Malaysia /Singapore right though to South Korea. These countries have generally good prospects, decent infrastructure and well educated populations. They cannot but benefit from rising demand in China and most have the political stability to take advantage of it.
The possible exception to this is Thailand, where the present PM seems unlikely to survive the current unrest. That makes investment decisions tricky, so perhaps Vietnam or Malaysia will benefit.

Myanmar, the former Burma seems more stable in this quarter than last, but it remains only a few months ago that it was a state ruled by the army.

The political risk in this area is conflict with North Korea, which would heavily affect South Korea.

Growth rates could be exceptional at up to 10 – 12%


It has been a quiet few months for Japan. There’s still the challenge from the Fukushima plant overhanging any prospects for dramatic growth, together with the somewhat sclerotic corporate structures. The worlds’ 3rd largest economy will continue to grow slowly.


The main stories in this region are of course Syria and to a lesser extent Egypt. Both economies are collapsing, and refugees fleeing Syria (in particular) are impacting on surrounding countries. Factor into that mix the long standing Sunni – Shiite divide where it seems likely that Syria is a proxy for Iran’s ambitions to become the dominant player in the region.

The Gulf States have significant natural resources, but Middle East oil & gas is becoming less important to the world economy as Shale Gas, improved efficiency and new discoveries reduce the world’s reliance on the region.

It is difficult to be optimistic for prospects in this region.


The Aussies had a good run up until the end of 2012, but I think they have more reasons to be optimistic about the cricket than about their economy for the next few years.
© Tim Luscombe March 2014

Newsnight & the Flowers interview – where were the regulators?

Watching Paul Flowers, the ex-chairman of the Co-Op bank, being grilled by Paxman on Newsnight last night, I wondered again how on earth he was ever approved to chair a bank.


It is bad enough that the co-op groups internal appointment process unanimously selected Mr Flowers (just how unqualified were the other candidates?) but then he was interviewed by the regulators and approved by them as well.

I’m reminded that amongst all the fury at the banking industry and the vilification of anyone even remotely connected to the banks, the regulators seem to have escaped all consequences and most of the blame. How is this possible?

Where were the regulators?

Perhaps this is unconnected, but I noted that the past chairman of the FSA, Hector Sants, took up a post in Jan 2013 with Barclays as Head of Compliance and Government and Regulatory Relations. By October 2013 he was suffering from “exhaustion and stress” and in November 2103 he resigned.

Do you have any faith in the regulators ability to prevent future crises?




Is the valuation of AO too high?

The business news this last week has included quite a big story about the valuation of AO, the online white goods retailer formerly known as Appliances Online.

For those that missed it, here’s what was in the Guardian (other papers took a similar view)

“But even the £1.2bn valuation is daft. AO last year made bottom-line profits of only £6.8m on sales of £275m. Punch those numbers through the calculator: 175-times earnings and 4.5-times sales for a distributor of low-margin electrical goods.”

There’s no arguing with that – these numbers are way out of kilter.

So is this the city gone mad? Possibly, probably. Too many people getting caught up in the hype of a success story that plays really well – the “£1 bet in the pub that turned a kitchen salesman into a multi-millionaire”

Valuations are an art form, not a science & investors are looking to the future. If a business can take on a mature market, like white goods, and apply some game changing methodologies to create a new business model and capture a decent market share in no time, perhaps it can do the same in other markets?

Is AO the new Amazon? There are some similarities. Amazon shook up a moribund market (bookselling) and has extended the business model and the technology to many markets and products. Maybe that’s what investors think could happen with AO?

Personally, I doubt it. I suspect that AO may be a target for Amazon, if they continue to show good progress and have some ground-breaking technology, but for now I think I’d rather sit on the side lines & watch than invest.