Buchler Phillips Quarterly Bulletin No. 12

Not enough Cooks

THEODORE ROOSEVELT once made an important distinction between a leader and a boss: a leader leads, while a boss drives. It’s a conundrum often seen in business, politics and our usual bulletin opener - sport. 

The retirement in recent weeks of former England cricket captain Alistair Cook from international play has once again raised questions about leadership in the national team. Cook won four Ashes series – two as captain – and broke numerous records that included England’s highest ever run-scorer and leading century-maker, his 32 being way ahead of the next highest 23. Few would argue that Cook led from the front and inspired his team. His Test successor, Joe Root, has done a fine job so far, but his reluctance over the past year to bat in the most important No.3 position - despite having the confidence of team mates, selectors and former captains - has inevitably questioned the extent of his hands-on approach.

UK political leadership across the spectrum continues to be questioned in these challenging times. Perhaps senior politicians, including recent Prime Ministers, are too CEO-like in their approach, managing resources with varying degrees of success, yet failing to lead and inspire. Whether in sport, business or government, overcoming challenges and emerging in better shape requires teamwork, unity and support from those not in charge. Sound management can preserve the status quo and avert disasters, but progress in building lasting value to weather future storms requires impactful, inspirational leadership.

Death on the High Street

Britain’s stricken retail chains may not necessarily be the targets of a single serial killer, but of many factors forcing the sector to adapt or die. It is too easy to pin all the blame on online retailing for the woes of several big names on the High Street: House of Fraser, Debenhams, Mothercare - even Marks & Spencer and John Lewis. True, internet transactions have risen from 4% of retail sales to 18% over the last decade, but analysts warn of underestimating the further impact of business rates, difficulty in borrowing, high rents and costly parking in shopping areas. Consultants at PwC calculate that 1,772 shops have disappeared from Britain’s 500 largest town centres in the last 12 months. 

The picture for total retail sales, while unexciting, is less gloomy. Retail sales were up 0.3% overall in August despite a slowdown in food and clothing, after a strong showing for both sectors in the previous month. Month-on-month growth in clothing stores was down 1.9% while food sales dropped by 0.6%, according to the Office for National Statistics (ONS). The falls were offset by strong growth in household goods stores at 4.5% and other non-food stores at 2.8%.

Trade bodies urge the Government to review business rates, saying that property-based taxes are a far greater proportion of overall business taxation in the UK than in other developed countries. Since 2010, the headline rate of corporation tax in the UK has come down from 28 per cent to 19 per cent, but business rates have risen by an inflation-linked increment each year, with commercial properties subject to periodic revaluations.

Regardless of government intervention, the High Street must step up its own efforts to adapt. Consumer demand will eventually reshape the bricks and mortar stores that remain, but continued growth in online sales at their average rate of the last decade would see half of all retail business shifting to the internet by 2044.

Ten years after

Could Lehman Brothers happen again? As we mark 10 years since the spectacular collapse of the US investment bank, resulting in the largest-ever corporate bankruptcy and an acceleration of the 2008 global financial crisis, where are the warning signs for the crash that  commentators seem keen to call? 

Global debt has continued to soar: at $250 trillion, it is 320% of world GDP, compared with 280% in 2008 - arguably a function of ultra-low interest rates, despite tighter controls over lending. Support for this debt is ultimately still based on high asset values, rather than ability to service, only now prompting central banks to move from quantitative easing to quantitative tightening. 

However, while relatively low growth in wages and productivity in the UK and continental Europe are compounding slow progress in GDP, many analysts point to China as possibly the most alarming source of a potential external shock to economies closer to home. China has accounted for more than 40% of the rise in global debt. Much of this borrowing has come from the “shadow banking” sector - lending by entities other than banks, such as trust companies, peer-to-peer lenders and micro-financing firms. The sector has already been reigned in significantly by Chinese authorities, but the same regulators must avoid any complacency based on unstoppable demand for housing in China and the rapid growth of demand for consumer goods. Ripples from a major slowdown in China would undoubtedly spread far and wide; fragile trade relations with the US may not help to calm the fears of global capital markets before a major wobble.

Economic Outlook

Global economic growth may have peaked, according to the Organisation for Economic Cooperation and Development (OECD). The leading think-tank says trade tensions are impacting confidence and investment, leading its analysts to project world GDP growth of 3.7% in 2018 and 2019 - marginally below pre-2008 crisis norms and with further downside risks. The forecasts have been shaved by 0.1% and 0.3% respectively, with UK growth estimates set at 1.3% in 2018 and 1.2% in 2019. The OECD says Brexit worries have squeezed corporate investment in the UK, while consumer spending remains affected. It is clear that global recovery since 2008 has been slow and would have been even slower without an unprecedented degree of stimulus from central banks.

British workers again face a wage squeeze after inflation jumped unexpectedly to a six-month high in August. The Consumer Prices Index (CPI) rose by 2.7% year-on-year, up from 2.5% in July. Analysts had expected a drop to 2.4%. Higher clothing prices, recreation costs and transport charges were behind the hike. UK base rates, raised from 0.5% to 0.75% in August, were held in September. The balance of commentators expects no further rise during Q4.

Last minute deal?

Only six months - or two Quarterly Bulletins - to go until Britain is scheduled to leave the European Union and businesses at home are already beginning to expect the worst: Brexit with no trade deal. In the aftermath of Theresa May’s Chequers Plan being rejected by EU leaders, the Prime Minister’s focus is shifting to promising companies an unequivocally pro-business outcome, with lower taxes and less onerous regulation front and centre after 29 March 2019. It’s a carrot for overseas businesses dealing with the UK, as well as for domestic enterprises. However, confidence in delivering this plan, alongside timely independent trade agreements with individual countries, is low, even among the PM’s supporters. 

 As mentioned here before, the real-life complexity of the supply chain should not be underestimated. The Chartered Institute of Procurement and Supply (CIPS) believes delays at UK ports and the Irish border could risk the collapse of one in ten British businesses affected by queues, border controls and paperwork. Carmakers such as Honda and Jaguar Land Rover have warned of disruption to the delivery of thousands of auto parts arriving daily from the EU into the UK. The port of Dover could be a key blockage point: 17% of the UK’s total imports passed through Dover in 2017, of which 98% were from the EU.CIPS says its research shows that a quarter of British businesses are planning to stockpile goods in anticipation of supply problems, with 4% already doing so.

Despite reported Cabinet support for a Canada-style Brexit agreement with the EU, whichremoved 99% of customs duties on European exports to Canada and vice versa, the PM is still said to prefer No Deal to a ‘bad deal’. Six months may not be a long time in EU negotiations, but it is a very long time in politics. Expect more Government revolts, Opposition stunts, proposals for a second referendum and the weekly threat of a General Election - but don’t expect business confidence to do anything but sink lower between now and 29 March.