What Did We Learn From January?

by | Feb 5, 2015

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Brian Tora, an associate with investment managers, JM Finn & Co, predicts a rollercoaster year.

This article was posted before the Greek election in late January which committed Athens to a tough policy on debt negotiations with the European Central Bank.




If the start of 2015 is anything to go by, we could be in for a bumpy ride as the year unfolds. Volatility has returned to equity markets in spades, driven by more uncertainty over the future of the European single currency zone, growing doubts over global economic growth and continuing geo-political concerns in a variety of areas. Investor sentiment has been damaged by markets pulled hither and thither as often conflicting news emerges.

Investors’ lives have not been made any easier by the decision of the Switzerland’s central bank to abandon its efforts to peg the Swiss franc to the euro. In part this reflects the difficulties of coping with the inflows into their currency, a problem that will become even more difficult if, as expected, the European Central Bank embarks on its own efforts at monetary easing, designed to head off the slide into deflationary conditions that appear to be developing. Such a move will surely weaken the euro further, making any attempt to hold down the Swiss franc well nigh impossible, despite negative interest rates.



If deflation is the Eurozone’s main concern – Greece aside, of course – the inflation figures published here for the end of 2014 showed we might have the same worries. They prompted the current Governor of the Bank of England to write his first letter to the Chancellor of the Exchequer to explain why the Consumer Price Index had come in outside the permitted range. As it happens, the Chancellor trumpeted these figures as a positive for the UK economy, but then we are close to a General Election.

At 0.5% the rise in the cost of living was the lowest for 15 years and the joint lowest since records began. You might well agree with the Chancellor that this is a good outcome. After all, it means that average wages are now rising faster than inflation, but such a low figure is not without its concerns. It is worth looking behind the numbers at why inflation is continuing to fall.


Aside from a cooling in the housing market and a slowing economic performance, that most important of commodities, oil, has been falling in price steadily. In part this reflects the decision of the Saudi Arabians both to punish Iran and to head off competition from new high cost producers, such as the shale oil developers, but collateral damage is inevitable. BP has announced job cuts in its North Sea operations, while the pain Russia must be feeling will be intensifying, making Putin’s next move even harder to predict.


Cheaper oil does, of course, mean lower petrol prices and fuel bills, delivering in effect a tax cut to consumers. But if inflation does turn negative and falling prices – or deflation – becomes the order of the day, those self same consumers that have more money in their pockets to spend are likely to defer buying goods. Why purchase something today when you are fairly certain it will be cheaper tomorrow? It was that attitude that brought an end to Japan’s economic miracle a generation or so ago.

So inflation is an indicator that needs to be watched closely. Like many who were suspicious of the likely outcome of that great financial experiment that is quantitative easing, I believed we would see inflation take off, bond prices fall and interest rates rise once the economic picture had improved. A resurgence of inflation is nowhere in sight, due mainly to subdued wage demands as workforces around the world remain cautious over continued economic prosperity.

The Greek Dimension

With a clear difference of opinion between the Germans and Mario Draghi, boss of the ECB, over whether quantitative easing is appropriate – or even legal – within the single currency zone, we have yet to see if Europe can head off deflation. Germany, of course, is paranoid over inflation – memories of the Weimar Republic still linger. My money is on inflation picking up here at some stage, but it wouldn’t surprise me if that stage is still some time off.


Brian Tora is an associate with investment managers, JM Finn & Co

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