On the face of it, the Bank of England’s freshly minted forecast for this year looked rosy. A glance at the headline figure of 2% growth in the quarterly inflation report was much better than the Bank’s gloomy forecast last year of 0.8%.
A 2% growth rate will again put the UK in the top rank of developed world nations and have City analysts scratching their heads over the apparent strength of the UK economy. How, they ask, with uncertainty clouding the horizon, can the great British consumer be so confident about prospects and merrily carry on spending?
These analysts should know better. Firstly, the 2% figure is the child of 2016, when growth was much better than expected following the referendum vote. That momentum has carried on into 2017, yielding a more optimistic forecast.
Secondly, the idea Britain has entered a new benign period of growth ignores the prospects for higher wages – which are less bright than Threadneedle Street thinks. Bank of England governor Mark Carney has spent his entire time in office predicting a return to wage increases of 3.5% to 4%. At each quarterly inflation report he informs the nation’s 31 million workers that the 2.5% average of the last few years will soon be history.
He was at it again last week, though with a slightly more modest prediction of a 3.25% rise next year and the year after. But it is clear from his manner, and the tone of the Bank’s report, that there is little conviction behind this forecast.
Maybe that’s because the monetary policy committee (MPC) he chairs appears to be even more split than usual on the subject of wages. The MPC has nine members who gather round the economic figures eight times a year and, rather like car mechanics, try to determine how fast the UK economy will go, given its ailing motor and worn-out bearings.
Last year saw the exit of Martin Weale, to teach macroeconomics at King’s College London, to be replaced by City banker Michael Saunders.
In a surprising role reversal, it is the academic who has been more hawkish, believing rising numbers of vacancies and higher employment levels would soon spur a wave of sky-high wage demands. Weale even voted for interest rate rises in 2014, based on his fear that rampant wage demands would trigger an inflation shock.
Saunders has taken a different view. In a speech last year, the former Citibank economist set out how the labour market had changed following the rise of self-employment, zero-hour contracts and the gig economy, meaning workers now had more limited powers to bid up their wages.
The last few months have seen a sharp slowdown in employment growth and a rise in numbers of people who have stopped paid employment. The fact that thousands have quit the labour market and haven’t signed on for jobseeker’s allowance shows they see little profit in searching for another job.
Business investment is another post-referendum victim. Those who believe it will improve point to the benefits for trade this year of an improving global economy, the steadying of Europe’s position after successive crises and the potential for a Trump boom.
A decline in the savings rate looks like it will propel spending for a little while longer, as will a rise in consumer credit. But unless the boost to wages takes effect, rising inflation will squeeze disposable incomes more than we’ve seen in the last three years and bring the economy down with a bump.
That means Britain needs a budget next month that puts a rocket under industry with extra support for investment and education. Without it, ailing coastal towns and left-behind places in the Midlands and north face the prospect, not of a bump, but of a slump that sets them back before Brexit has even taken effect.
Snap needs to empower its shareholders too
It is obligatory for social network pioneers to boast that their inventions “empower people” and, sure enough, that Facebookish phrase can be found in the IPO document filed last week by Snap Inc, the owner of Snapchat. But the commitment to empowerment and openness usually finds its limit when it comes to new shareholders’ rights.
Mark Zuckerberg kept control at Facebook by writing a rule that the shares held by insiders such as himself would have 10 times the voting power of the version offered to outsiders. That was arrogant and unfair but it has nothing on Snap’s wheeze. The company says its newly issued shares will have no votes whatsoever.
What’s the problem, some might ask. Nobody is obliged to buy a slice of Snap and become a third-class investor in this loss-making company whose backers think it could be worth $25bn.
Unfortunately, however, some people are obliged to buy. They are the index funds who are forced to own every component of a stock market index. Such a style of investing is popular because it is cheap. But why should index investors be deprived of even a small voice in the affairs of the company, like the election of directors?
Snap’s answer, like Facebook’s, is that long-term success is most likely to be achieved if the founders are free to take risks. This point of view is not universally shared. US pension funds are protesting about Snap’s governance outrage. So they should. Dual-voting structures are an abuse of the principle that equal voting rights go hand-in-hand with equal economic risk.
In a sane world, companies like Snap would be excluded from major stock market indices, but that is not going to happen – or not soon. Instead, let’s hope big US investors – like BlackRock and Vanguard – organise a boycott of this IPO in its current form. One share, one vote, is a principle worth defending. If demand for the non-voting stock evaporated, Snap chief Evan Spiegel would quickly understand that empowerment is meant to be more than a marketing slogan.
Not a great connection
Mike Ashley and Stephen Marks are not a match made in heaven. Ashley, the founder of Sports Direct, is seen in the City as being taciturn, having poor standards of corporate governance, and overseeing a company that is underperforming. Marks, the founder of French Connection, is seen as being, well, exactly the same.
It emerged last week that Sports Direct has bought an 11% stake in French Connection. This was welcomed by other shareholders, who have become frustrated with Marks’s dominance within the company as chairman and chief executive.
It has been a downward spiral for French Connection since interest in the revival of its FCUK branding died out a year ago. Quite how Ashley can help is a mystery. His skill is in piling it high and selling it cheap. In fact, Nike and Adidas have limited the products they supply to Sports Direct, fearing damage to their brands.
The share purchase looks like another attempt by Ashley to make some money after similar investments in Debenhams, Tesco and House of Fraser. Given the problems facing Sports Direct, shareholders must wish he would focus on the day job.
