A 'grey swan'

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

the Guardian,

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.