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01 March 2024

Cheaper money isn’t always good

By Jeff Randall

Sainsbury’s, it seems, is the Hillary Clinton of British retail. It was forecast to be a high-profile loser, but confounded critics, bouncing back with healthy sales growth – up 3.7 per cent – for the holiday period.

Like Mrs Clinton’s surprising victory in New Hampshire, the better-than-expected result of Sainsbury’s provides a platform for optimism, but offers no guarantee of success in 2008. It is still a long haul from here to the end of the year.

At many other businesses dependent on domestic shoppers, alarm bells, rather than tills, have been ringing. After a 10-year spending boom, thousands of over-indebted households are about to go bust, as they run out of credit.

Last week’s main casualty, Marks & Spencer, sparked panic among investors, after unveiling a 2.2 per cent fall in Christmas sales. The company’s shares, which had already gone down by 33 per cent since last spring, dropped another 20 per cent. More than £5 billion (Dh36.35bn) of value has been wiped out.

If your pre-tax income fell by tuppence in the pound, you might feel a bit miffed, although it is unlikely that you would be screaming for emergency surgery. But that is not how it works in the City, where little separates triumph from disaster.

It is the economics of the hamster wheel. Companies learn to run more and more quickly; fund managers and analysts demand ever higher returns.

A decline in the rate of growth, even though the business is still expanding, is often regarded as failure. When there is an absolute reversal, few bosses are given the chance to put things right.

Those who last at the top beyond three or four years are invariably even better at managing City expectations than they are at running the business. They cut themselves some slack by under-promising and over-delivering.

Until this week, Sir Stuart Rose, M&S’s chief executive, was a master of the positioning process, always having a little more up his sleeve than his shareholders had been led to expect. Which partly explains why the stockmarket responded so savagely to his stumble.

Rose is popular with small investors and the financial press. He is peerless at working the cocktail circuit. He has enough goodwill in the bank to survive this setback, but is sufficiently experienced to know that he cannot afford another serious slip-up.

Like politicians, corporate leaders have a capacity for claiming credit when times are good and blaming outside influences – the economy, the weather, currency markets etc – when their businesses run into trouble. On the way up, the boss is a genius; on the way down, it is the other bloke’s fault.

When the British economy was powering ahead (pumped up by personal and state borrowing), Gordon Brown told us it was all to do with his prudent management. Now that his biggest blunder has been exposed – a failure to save for a rainy day – he points the finger at turbulence in America.

In a similar vein, Rose says only 25 per cent of his company’s woes are self-inflicted, the rest he blames on “the market”. Even so, he insists there is no crisis at M&S and on that point he is right.

A crisis is when a business runs out of money, when it can no longer pay its debts. Even after its disappointing festive season, M&S remains on track to make about £1bn of pre-tax profit this year. Its bankers are sleeping soundly.

But let us not forget that Rose’s predecessor, Roger Holmes, was sacked not for making losses, nothing like it. He was booted out because on his watch M&S’s profits had fallen below £800 million. No wonder Rose is calling for an immediate cut in interest rates – and he is not alone. Just about every retailer with a worrying sales outlook is on the Bank of England’s case for cheaper money.

The British Retail Consortium operates its own version of a Chinesek water torture on the heads of Monetary Policy Committee members, a relentless drip-drip of demands for rate cuts to stimulate yet more spending. If the BRC had its way, borrowing would be free of charge. Even mighty Tesco – surely, the last business in the land that needs a leg up from Threadneedle Street – has joined the chorus.

It is as though the retail sector has come to regard maximum activity by consumers as the minimum required to keep it happy. Unless shoppers are bashing up their credit cards, life on the other side of the counter becomes intolerable.

The Bank did the right thing yesterday by resisting calls for a reduction in interest rates. Nobody is denying that some consumers are feeling the pinch, but not all retailers suffered a poor Christmas. John Lewis, its sister company Waitrose, Morrisons, Selfridges and JD Sports performed very well.

When the going gets tough, shopkeepers have to try harder to prise out our pennies – and there will be winners and losers. DSG, formerly Dixons, has had a torrid time, as have Signet, the jewellers, and Land of Leather.

But it is not the Bank’s role to shore up every high-street operator in need of a cash injection. The Monetary Policy Committee’s main remit is to keep inflation under control. On that front, there is plenty of evidence to suggest that the government’s target of two per cent would be significantly breached by a much looser monetary policy.

When interest rates are cut, sterling comes under pressure because holding pounds is less attractive. That in turn makes imports more expensive. In addition, as the CBI points out, “inflationary pressures from energy and food costs remain worrying”.

This year, we are expecting a record number of personal insolvencies, perhaps 120,000 or more, and at least 50,000 homes will be repossessed.

After an unprecedented borrowing binge, hundreds of thousands of people are living on the brink, shuffling resources to stave off creditors. It would be hugely irresponsible for the Bank to encourage them to take on more debt.

Consumer confidence is cooling, but that is good. Too many people have been spending like drunken sailors, inebriated on a cocktail of unsustainable house-price growth and an explosion of readily available, cheap loans. In these circumstances, retailers have rarely, if ever, had it better.

To those who say, “We can’t survive unless the 24/7 house party is allowed to continue”, tough luck. A slowdown will sort the fish from the chips. High-quality businesses – those that understand the magic ingredients of value for money – will continue to trade profitably.

Jon Cruddas, Labour MP for Dagenham, said the Tony Blair years had been blighted by a “celebrity and shopping agenda”. This week’s events, perhaps, signal an end to some of that.

If the price of putting our economy on a firmer footing is a little stockmarket turmoil – as investors wake up to financial reality – it is one worth paying. (The Daily Telegraph)