Shadow
of the 'grey swan' looms darker over the economy
Sir
Martin Sorrell may express himself oddly, but he's right to note that
the mood across global business is getting gloomier
Do
black and white swans combine to create a grey swan? Photograph:
Muensterview/Tronquet/EPA
25
October, 2012
The
ornithological metaphor seems wrong. Shouldn't a grey swan, which we
know doesn't exist, describe an imaginary risk rather than a known
and real risk?
Never
mind. Sir Martin Sorrell's broad point seems correct: there was
definitely something in the water in September, a flat month for WPP
to complete its weakest quarter for revenue growth since the first
three months of 2010.
Sorrell's
thesis that his and others' clients suddenly became more cautious
rings true. The 1% rise in UK GDP in the third quarter, then, says
little about the wider corporate picture. Sorrell's four beasts
provoking fear in boardrooms are the eurozone crisis; political
tensions in the Middle East; concern about the state of the Chinese
economy; and the deficit, debt and fiscal cliff in the US.
None
of those worries is new, of course. The point is that they are
looming larger and are already affecting corporate spending and
behaviour. 2012 has been a year of deteriorating expectations. At the
start of the year UK plc, meaning the complete set of quoted
companies, was forecast to post a combined 5% increase in earnings;
now, a fall of a greater magnitude is pencilled in. Similarly, the
current crop of third-quarter earnings reports in the US is yielding
many disappointments, from Google to McDonald's to Du Pont.
Sorrell
identifies the US as the biggest risk. That, too, seems correct since
the fiscal cliff – the raft of tax increases and spending cuts that
will be implemented in January unless Congress agrees a different
path – has the potential to do serious damage to the global
economy.
Lombard
Street Research ran the numbers through its "fiscal cliffometer"
this week and concluded that a tightening worth 2.6% of US GDP would
produce growth of just 0.4% in the US in 2013, a contraction of
almost 2% in the eurozone and growth of 4.5% in China. "I'm not
an equity strategist, but I'd suggest current stock prices don't
properly discount that scenario," commented Lombard's Dario
Perkins dryly. Quite: such low numbers simply aren't in most City
spreadsheets.
Who
knows? Maybe the investment world's implied faith in US politicians'
pragmaticism and central bankers' box of monetary tricks will prove
well founded. And maybe those bullish fund managers are correct to
regard weak third-quarter earnings numbers as a "rear-view
mirror" phenomenon. But, if Sorrell is right, the mood on the
front line of real companies is considerably less optimistic.
Indeed,
away from the world of pontification, Ford announced plans to shed
10% of its UK workforce on Thursday. The telling phrase was "weight
of numbers" – the sheer size of overcapacity in the European
car market. Government-sponsored scrappage schemes generated demand
for a while, but vehicle sales in western Europe now stand at the
lowest level for nearly 20 years, down by a fifth from their peak in
2007.
On
a day of economic statistics, that's the one that, unfortunately,
stands out.
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