Comment: Normality as elusive as interest rate rise

Bill Jamieson. Picture: Jane Barlow
Bill Jamieson. Picture: Jane Barlow
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FOR most of the past year the prevailing view across Western economies has been that we are returning to “normal”.

This is one of the most rubbery words in the economic lexicon. What, exactly, is “normal”? When did it last prevail? And how can we tell the difference between a temporary period of reduced volatility and “normality”?

Janet Yellen: signalled rates would rise in US. Picture: Getty

Janet Yellen: signalled rates would rise in US. Picture: Getty

There is a related consensus view: that interest rates here and in America would be raised from their emergency level of 0.5 per cent by the turn of the year. Recent signals from Janet Yellen, head of the US Federal Reserve, signalled just this. And the latest “forward guidance” from Bank of England governor Mark Carney barely a fortnight ago echoed this view.

But scarcely had these wisdoms been imparted than news of China’s devaluation of the yuan sent shock waves around the world.

It has stirred concerns about a tit-for-tat currency devaluation war, disruption in world financial markets and a slowing in global growth. This disrupts the “back to normal” story. Western central banks may now have to stay their hand on interest rates.

The initial 2 per cent devaluation hardly seemed to justify these fears. But the yuan slipped further over the next two days.

Behind the devaluation is a greater concern. It is that the China economy, the world’s second largest, may be weaker than officially admitted. Having grown at a stunning rate of 10 per cent a year, boosting commodity and natural resource prices, fuelling expansion in Africa and Latin America and filling shopping arcades around the world with low-priced Chinese products, the “China Boom” may now have cooled. Official figures indicate that China’s economy is now growing at a more moderate annual rate of 7 per cent. But some analysts believe the real growth rate is now nearer 4.4 per cent. This would require a much larger devaluation if China wishes to regain momentum.

The immediate effect of devaluation is to make Chinese goods and materials cheaper on world markets. This is not good news for manufacturers of rival products in other countries. A yuan devaluation is likely to slow the global economy.

Thus, at a stroke, the argument underpinning the “normality” thesis and the case for an early rise in interest rates here and in America – the forecast of a gentle rise in inflation by the end of the year – looks less assured. Those who predicted that a “return to normal” on interest rates might start before the end of the year are now altogether less certain of this view.

Oxford Economics has crunched the numbers on what a 10 per cent devaluation against the dollar might mean. A “naïve” depreciation (holding other things constant) would reduce inflation in some countries, with the US Federal Reserve most likely to delay its first rate hike beyond September.

The global recovery would be a bit slower than currently forecast, with growth of 2.9 per cent in 2016 rather than the three per cent currently envisaged. Should the China slowdown prove more marked, the impact would be much stronger.

Japan has already responded, with hints that it could print more money to offset the effects of China’s devaluation. And in the Eurozone, a weaker euro would never be admitted as a formal policy aim – but would be keenly welcomed behind the official stoic façade.

As John Stepek points out in Money Morning, “this all points to looser monetary policy across the globe, as central banks everywhere crank up the fight against each other and deflation”.

China’s central bank has now signalled that it does not want to see the currency fall much further. It has certainly suffered enough instability in its domestic stock market to allow uncontrolled upheaval. The ideal would be a slow, steady decline that does not trigger retaliation.

But that has been the ambition of currency devaluations through the ages – an ambition all too rarely fulfilled.

In defence of Michelle Mone

BARELY had Scottish lingerie entrepreneur Michelle Mone been appointed by David Cameron to advise on how to encourage business start-ups in high unemployment areas than the fur started to fly. The Prime Minister’s judgment was questioned, with one executive claiming he has “lost his marbles”.

Suggestions that the founder of the Ultimo bra firm is soon to be elevated to the House of Lords as a Conservative peer only caused eyebrows to rise further.

Douglas Anderson, of Glasgow-based machine tool firm GAP Group joined in the attack, saying her appointment made a mockery of the whole business. Others have dismissed it as a glib and superficial PR stunt.

Now it is certainly true that Mone has had a rocky business record. Her business, MJM International, had net liabilities of more than £287,000 at the end of December 2013, having recorded assets of nearly £500,000 the previous year. The business made a £547,018 loss in the 18 months to October 2012. Her marriage broke up in a fiery blaze. Mone subsequently forged a business partnership with Sri Lanka-based lingerie group MAS Holdings, which has a majority stake in Ultimo.

Hardly a commanding role model, some might think, to give advice to aspiring entrepreneurs in the most challenging areas of the UK.

But that is to miss the point about entrepreneurship. It is a rocky pursuit. It is prone to setback and crisis. Most business start-ups fail. The road ahead for someone starting up or building a business is never a smooth progression of “onwards and upwards”.

I cannot say I know the lingerie business well. I have never worn an Ultimo bra. But I suspect Mone has packed in more experience of setbacks and how to dust down and start again – those vital qualities of perseverance, resilience and bounce-back – than any honey-tongued academic from Harvard Business School or quangocrat bristling with non-executive directorships.

Michelle Mone is more likely to compel attention from young people in disadvantaged areas, not because of her chequered business record, but precisely because of it.

But as always, judgment should be deferred until we see that this appointment is followed through with real results.