Buchler Phillips Quarterly Bulletin No.4

At the top of their game

So far, so good for Aussie Eddie Jones’s managerial grip on England’s rugby squad. Of course, foreign coaches for national teams (or domestic sport) are nothing new. But they underline the need to have the right man or woman for the job, wherever they come from. Look at Mark Carney (Canadian) at the Bank of England; Marc Bolland (Dutch) at Marks & Spencer; Sam Walsh (Australian) at Rio Tinto; Veronique Laury (French) at Kingfisher and another Canadian, Moya Greene, running Royal Mail. Experience and a track record of delivering success are key. Eddie has the additional challenge of balancing youth with his multi-capped players. Could he be close to finding a potent mix?

In-out-in-out, shake it all about

Imagine if the European Union mirrored the Six Nations and all differences could be sorted in 15 games of rugby. Almost daily polls show an in/out vote for the UK this year too close to call, with the stayers marginally ahead. Assuming that, at the very least, a vote to stay forces internal change, the macroeconomic effects at home may be some way off. But UK SMEs have much to consider. Most believe they are disproportionately affected day-to-day by restrictive red tape and EU regulation, missing the opportunities of a large single market because of bureaucracy. Both the Commission and the UK government need to put small business at the heart of their thinking in coming months.

The illusion of falling failures

The same SMEs dominate company administrations, which fell by 10% in 2015 to 14,629.  Even so, more than 100,000 SMEs were out of pocket last year as a result of suppliers or customers going under - such is the snowball effect of problems at the grass roots. Higher minimum wages and business rates this year will add to the woe. Most forecasters expect an upturn in administrations this year, after a five-year slide. Some even blame EU uncertainty, to a certain extent, but the ‘known’ factors are already beginning to take their toll on growth, before considering the potential impact of ‘unknowns’. Strip out the support of quantitative easing and loose monetary policy since 2008 and the basis of recovery in recent years looks fragile.

Drilling towards a downturn

We should not be surprised that the negative effects of low oil prices arrive far quicker than the benefits. The oil services sector, a disparate spread of companies, is no stranger to cyclical prices, but with analysts refusing to rule out further falls in Crude to as low as $10 a barrel, drastic operational change will be the key to survival. Investment in new projects will not come before there are clear signs of long-term price stability. Apart from the demand side of the equation, there is also risk to the banking sector, with ample scope for knock-on effects: Bank of America Merrill Lynch estimates that European banks could book $27bn in loan losses from energy related firms - or 6% of the oil industry’s pre-tax profits over three years.

Pounding the pavements

After a torrid time in December, the UK’s retailers enjoyed a fillip in New Year trading as colder weather and January sales drove shoppers offline and back to the high street. Overall footfall rose 1.2% in the first month, against a 2.2% December fall. While retailers blamed mild weather for poor sales earlier in winter, a number of key non-food players had resisted cutting prices before Christmas – a post-recession feature of the high street that, sadly for them, may be here to stay. Throw in families’ higher spending on leisure activities than new clothing at present and retailers cannot afford to take their eyes off the ball. Remember, around 40% of retail profits are made in Q4. Turning our attention out of town, the German discounters are again stealing a march on the UK food sector: Aldi’s 80 new stores will give it 700 by the year end. Its 12 month sales to January rose 13%. Expect further pain in the supply chain supporting Tesco, Morrisons and Sainsbury.

UK outlook

Forecasts for base rate rises continue to drift further out, with the balance of analysts not expecting any hike from the 0.5% of the last six years until the first half of 2017. The Bank of England's quarterly Inflation Report on February 4 balanced consensus forecasts with forward market rates, indicating 0.5pc for 2016, 0.8pc for 2017 and 1pc by 2018. UK quarterly GDP growth, which had retreated in Q3 2015 to 0.5%, largely due to the effects of the BRICS downturn, stayed at 0.5% in Q4. Despite December’s surprise 11-month inflation high of 0.2%, boosted by air ticket prices reaching a 13-year peak, 2015 consumer price inflation averaged 0%, its lowest level since comparable records began in 1950. Similar blips may affect monthly inflation figures during H1 2016, but real growth will be hard to spot. UK businesses of all sizes and in all sectors face considerable pressure to keep tight control on investment plans and cash flow if they are to ride the turbulence that is now widely expected.