The pound bounces back
MANY of the adverse forecasts for the British economy in 2017 are based around the assumption that the sharp depreciation of the pound will lead to a burst of inflation. In turn it will crush real incomes, spending and output.
The odd thing is that, in November, the skittishness of sterling on foreign exchanges has given way to stronger trading. In the weeks before Donald Trump’s election, sentiment on currency markets was that Brexit made sterling the weakest link – as seen on October 6 when it tumbled 6pc to $1.18 in a ‘flash crash’. What we have seen in the past month is a gradual strengthening of the pound as concerns about leaving the EU and its impact on the economy have dissipated.
Sterling is still 10pc down against the euro since the June 23 referendum. It nevertheless has recovered 5pc in November, which means all those warnings about higher prices may need to be revised. Among other things, the pound has been dragged up by a mini-dollar rally, the result of the UK’s close corporate ties to America.
When the pound took its biggest falls after Brexit, the view was that it would remain weak because of the dire predictions for the British economy. The Bank of England talked of the risk of a ‘technical recession’ and George Osborne cautioned that the jobless rate could rise by 500,000.
Recent data shows the UK to be resilient and forex strategists are revising their view of the pound’s prospects in 2017. There is now a focus on the eurozone and Italy in particular where the combination of a broken banking system and a referendum could potentially speed separation from the EU.
The bounce in the pound is a double-edged sword. The extra competitiveness for exports could be partly erased, although no one is suggesting sterling could return to pre-referendum rates. On the plus side, the muchvaunted forecast of big inflation is dissipating. It was always likely that the pass through from the higher cost of raw materials to consumers would not be as great as the economic models were showing.
They failed to take sufficient account of the competitiveness of Britain’s retail sector and price disruption from online sites seeking to make hay at the expense of bricks and mor- tar shops, and the willingness of corporations to take a margin haircut rather than watch customers head for the door.
Even fast-moving consumer goods companies such as Unilever and tech firms such as Apple must recognise that the days when they could bully retailers and customers into submission are long over. The sterling bounce could mean doomsters predicting a squeeze on incomes are engaged in wishful thinking.
Board bedlam
ENDING the scandal of excessive pay in the boardroom has eluded policymakers since former Marks & Spencer chairman Sir Richard Greenbury produced his landmark report in 1992. Despite repeated efforts to put the brakes on since then, the pay gap between those at the top and median workers’ income has grown ever wider.
When it comes to their own pay, bosses have been shown to have the hides of the rhinoceros, always finding ways to justify excessive pay even in the face of shareholder anger. The £70m WPP chief executive Sir Martin Sorrell takes to the pages of the FT to defend the indefensible, despite hefty shareholder dissent. Remuneration committees are often peopled with the weakest members of the board who outsource the difficult work to pay consultants who take pride in finding more ways of stacking up the share options.
Current political circumstances suggest there has never been a better time to curb excess. Instead of shying away from annual votes on remuneration, the Government should pass an early bill and dare opposition parties to reject it. Of course, the pay ratio between the top and the rest of the workforce should be published each year.
It may be that workers at Goldman Sachs have less to complain about than those in a big services company such as G4S. But it is up to the pay committee to explain that. Workers on the board can be a waste of time, as we saw through the dreadful Co-op Bank crisis. So it is the quality of directors, including employee representatives, not the background of the non-executives which counts.
Many private firms are exemplary employers, as the John Lewis and JCB models show. As a consequence it will do them no harm if governance of private companies is tightened. Benefits in exposing the rogues easily outweighs the negatives.
Red menace
AFTER a $200bn (£160bn) overseas buying splurge in 2016, the Chinese authorities want to curb foreign bids. But few of the deals done will be halted. The ban on buying noncore assets would not stop Chem China’s proposed £35bn bid for Switzerland’s Syngenta.
Nor would it prevent Ctrip buying Edinburgh-based Skyscanner as they are both in the travel business. In China, Ctrip has a reputation for running an army of bicycle messengers delivering chits by hand and collecting hard cash. Skyscanner uses engineers and algorithms to deliver the best deal.
Same thing really.