Will oil cause the next recession?

That was the debate I was having with few friends couple of days ago and I must say that algthough we did not all agreed I am pretty convinced that it will. In fact, a member of my family is out of work at the moment because he use to transport oil between South America as a middleman and his services are no longer required creating the first bankrupcy of the year that I know of. Hard to take but why pay someone in the middle when prices are so low by going direct. More margins are being made at the moment as very few companies share the benefits with the consumer. Only recently have supermarkets and airlines have started lowering their prices. Why? Officially because they bought their stock of petrol at a higher price as they secure deals many months ahead. The reality…PROFIT. Would I blame them, of course not.
Many forecasters believe consumers will spend the windfall, and thus boost the economy. But almost all of the savings from lower pump prices so far have been used to rebuild household assets and reduce debt. Consumers tend to increase their savings in tough times; they’ve been doing so during the six-year recovery.

Lower oil prices, however, could come with a downside. As they work their way through the system, deflation could follow. Already, 10 of the 34 largest economies in the world have seen year-over-year declines in consumer prices. The risk is that deflationary expectations could follow, encouraging consumers to withhold purchases in anticipation of even lower prices. If that is the case, excess capacity and inventory would build up rapidly and large quantities forcing price down.

Do you agree?

Benoit Mercier


Facebook’s price-earnings ratio near record low ahead of fourth-quarter report

A recent drop in Facebook Inc’s stock has left the online social network trading at earnings multiples near record lows as it prepares to hand investors its fourth-quarter report.

Along with fellow technology leaders Netflix Inc, Apple Inc, Alphabet Inc and Amazon.com Inc, Facebook has been among Wall Street’s top stocks in recent years, but a market selloff sparked by plummeting oil prices has pulled it down 7 percent so far in 2016.

In its fourth-quarter report due after the bell on Wednesday, the digital advertising heavyweight is likely to post revenue up 39 percent and net income up 35 percent, in line with growth rates in recent quarters, according to the average estimate of analysts tracked by Thomson Reuters.

P/E ratio is forecasted to go down every year, which is not good news to investors. However, there is still a strong recommendation to buy



What strategy for TESCO?


In the past few months we have read a lot of negative articles about TESCO, a giant UK retailer. It has awaken my curiosity, not that I would pretend that I could solve their strategic issues, but I amused myself this weekend at writing a strategy as if I was the TESCO CEO. Feel free to feedback.


Tesco started in 1929 with one store. By 2006, Tesco had overtaken Sainsbury’s to become the UK’s largest grocery store, and by 2007 account for 31.8pc of the total UK grocery market and the world’s 2nd largest retailer (by sales), operating in 12 countries (UK representing two third of its sales). Tesco got there through diversification and spotting gaps in the market, especially in the field of consumer behaviour. In 1995, Tesco revolutionised how data was collected and used through the Tesco Clubcard.

However, in January 2012, Tesco released its first profit warning in 20 years, and by November 2014 the share price had dropped to less than half the value of its record high of 2007. Its share of the grocery market has dropped to 28.7% by October 2014.


Figure 1: Tesco market price 2007-2014

UK grocery market analysis

Overall UK grocery market:

* Worth £174.5 billion in 2014.

* The grocery market’s share accounts for 54.5p in every £1 of UK retail spending.

* By 2019, the UK will grow by 16.3% to £203bn, with the fastest growth sectors being convenience, discounters and online3.

tesco fig2.png
Figure 2: IGD UK Grocery: Market and channel forecasts 2014-2019


Figure 4 – UK grocery market by 2019

Internet UK grocery market:

* Worth £7.8bn in 2014 +98.5% since 2009

* Growing internet penetration (80%)

* Rise of m-commerce with smartphones (+51% yoy)

UK discounting grocery market:

* Worth £9.5bn +35% since 2009

* Aldi (+35%) and Lidl (+17%) witnessed their highest ever growth in sales and market share (3.4% to 4.6%) and (2.9% to 3.4%)

Tesco 3 C’s

Core Customer analysis

Rural and urban
All age categories
Males and females
Low and middle income category
Students, employees, professionals
High school, technical, Bachelors,
Social status
Working class, skilled working class, lower middle class, middle class
Family size
Single individuals, nuclear and extended families
Traditionalists, contended conformers
Easy-going, determined
Benefits sought
Cost advantage, variety
User status
Active user
Sceptical, positive

Table 1: Target customer for Tesco


* Online expertise and multi-channel synergies.

* Large scale operations, multifaceted distribution network from supermarkets to convenience stores and online shopping.

* Customer focused (CRM) – Clubcard: significant data collection on consumer habits since 1995

* Large range of products from Tesco Value range to Tesco Finest with significant purchasing power against branded products and suppliers.

* Large store network and very good geographical network across the UK

* Strong financial services division for personnel insurance and banking.

* Designed and implemented supply systems that effectively link existing shops with Tesco.com

* Staff – large pool of talented employees nurtured through internal training facilities


Figure 5: UK supermarkets’ market share

The big 6 dominate the UK grocery market with a combined 85% share, but heavy discounters have started to gain market shares due to the weak growth in the sector, limited product differentiation and limited costs for consumers to switch suppliers.


Table 2: UK Grocery market competitors

Macro and micro environment analysis

PESTEL analysis

* Political factors – In the UK the key political factor is the competition commissions view point on market share.

* Economic factors – continued economic stagnation, and the fact consumers have less money to spend on groceries.

* Social Factors – changing consumer habits too ease of shopping, value, and online shopping.

* Technological – where changing consumer habits are requiring smarter technological improvements.

* Environmental – reducing energy usage, packaging and transportation.

* Legal – Government policies and legislations over competition, food safety, food labelling impact the legal environment.

Porter 5 forces:

  • Rivalry among competitors – High. High concentration ratio with slow industry growth. Large number of local and global competitors. With the online boom smaller players are now able to compete with big players.
  • Threat of new entrants – Medium. High barriers of entry due to capital requirements, low product differentiation, low access to distribution channels and low switching cost.
  • Threat of substitutes – Low. They are a necessity only available from the industry.
  • Bargaining powers of suppliers – Low. No threat of forward integration, high threat of switching
  • Bargaining power of buyers – Medium. Relatively price sensitive, low switching costs, customers are becoming more knowledgeable about products and distributors.

Current strategy Challenges

Following an article given by Dave Lewis, I have identified 5 key challenges:

1. Tesco doesn’t know which shoppers to target. The supermarket is caught somewhere between the more upmarket offer of Sainsbury’s and Waitrose and the discounters Aldi and Lidl.9

2. The UK retail market is sluggish – Consumers have yet to feel the benefits of the country’s economic recover

3. Brand clarity and consistency is lacking

4. Tesco isn’t well loved – The supermarket has concentrated on high growth, fast expansion and cheap bargains rather than ‘softer’ notions of customer care or having good relationships with its suppliers

5. It lacks a clear management strategy10

Strategic Objectives

* To retain this year market share of around 28-30%. To regain market shares from discounters and upmarket competitors in the next 3 years to reach a 40% market share.

* To stay relevant to all customer segments through its Finest and Value ranges.

* To refresh the brand proposition in order to increase net promoter score.

* To increase store efficiencies and floor space to maximise returns from all stores

* To cut costs by divesting from non-profitable stores and reducing overheads

* To increase margins mix back to the 2014 levels (7.3%)

* To drive Every Day value prices through improved relationship with its subsidiaries to deliver over £300m savings

* To focus on complementary sectors outside of grocery such as children wear and financial services.

* To adapt to changing consumer habits and technological innovations

* To reinstate trust with employees, customers and shareholders

Proposed Strategy

Based on the above analysis, it is evident that the current strategy has not been working and meeting customers as well as shareholders expectations. Based on Tesco’s core competencies, I have developed a holistic new strategy:

1. Define a new brand positioning and segmentation 

Tesco doesn’t know which shoppers to target and its brand is not well loved in the UK. The supermarket is caught somewhere between the more upmarket offer of Sainsbury’s and Waitrose and the discounters Aldi and Lidl.

Our aim is to:

  • Increase revenue
  • Regain market shares by pushing out Aldi and Lidl and capturing some of Waitrose and M&S shares
  • Improve Tesco’s net promoter score

Brand/Marketing and distribution strategy

I propose to revamp the brand and distribution strategy on a cost neutral basis.

  • In terms of brand strategy, I propose to retain the Finest and Value range but to add a new brand “local”. See below.
  • In terms of distribution, I propose:
    • Hypermarkets and supermarkets: close non-profitable and refresh/modernise others
    • Metro/Express: Transform them into Tesco Finest and Tesco local stores based on their current locations and socio demographics catchment area

Based on research, Tesco customers feel they should get more and they feel their expectations are not met. But they want more (choice and quality) but by paying the same or less. Therefore, I would advise to be relevant with the target audience by having a new strapline “Expect more. Pay less”.


I recommend conducting a major customer research across all brands/sectors with a partner such as TNS, to better identify, define and segment customers. Also, I propose to appoint a marketing agency such as Saatchi & Saatchi to launch a new brand proposition based on the findings of the research.

I decided to let my creativity flow as to what I would do

Brands Tesco Finest New – Tesco Local Tesco Everyday Value
Logo tescofig11.png  TESCOFIG15  TESCOFIG16
Strategy Growth strategy Product differentiation strategy Predator pricing strategy
Positioning Premium range. This range is about high quality ready meals, products and service. Healthy and organic range. This range is about bringing local producers’ healthy and organic products to local consumers. Supporting the local economy. Value/low budget range but with good quality.
Slogan Expect more Premium. Pay less Expect more Organic. Pay less Expect more Value. Pay less
Competitors Waitrose, Marks & Spencer Sainsburys, ASDA, Morrisons Aldi, Asda
Consumer typology Age: 30-70 years old
Lifestyle: Busy lives, work and lots going on outside of work. Enjoy eating great food and going to restaurant but as little time to cook.
Age: 25-60 years old
Lifestyle: family oriented. Love walks and the nature. Strong engagement within the local community
Age: 18-50 years old
Lifestyle: little revenue and always looking for bargains and spending little on grocery in order to maximise their savings
Core Target Segmentation A, B, C1 – White collars B, C1, C2, D social demographics grades – Blue collars

B2B customer base

C2, D, E social demographics grades. Students, working class, unemployed.
Product 1,500 high quality products and packaging 1,000 local products. 2,000 products
Price Premium pricing strategy but remain slightly cheaper than competitors Status quo pricing strategy Aggressive low price strategy. Always cheapest
Place New – launch of Tesco Finest stores – these are small stores in market towns and upmarket locations. They do not range any other products. They have a finest restaurant and café also available. Visual merchandising is optimized.

Hypermarkets and supermarkets – all Finest products are visually merchandised separately from the other products in the aisle. Also, a Finest section is created to create a unique premium experience

New – Convenient stores – these are reconverted Express stores located in the heart of the local communities

Hypermarkets and supermarkets – all local products are visually merchandised separately from the other products in the aisle.

New – launch of Tesco Value stores – these are reconverted Express stores located in popular locations. They do not range any other products. Visual merchandising is done in bulk.

These products are also available in hypermarkets and supermarkets

Promotion Use a combination of above-the-line and below-the-line promotions with a focus on its quality and service Use a combination local below-the-line promotions with a focus on its local products and local activity Use a combination of above-the-line and below-the-line promotions with a focus on its prices and brands

2. Create a new product strategy for each segment 

I suggest to retain but revamp the Finest and Value range but also to add a new brand called “Tesco local” in the grocery division. The aim is to increase ROI and margins through reviewing the number and quantity of brands carried. Focus back on volume through reduced diversity. Allows Tesco to exert purchasing powers on suppliers to increase margins. Finally, like ASDA, there is a need to invest into low prices through improved relationship with its subsidiaries to generate further savings.

3. Streamline the store network

In terms of hypermarkets and supermarkets I propose to not open new stores; close non-profitable and refresh/modernise others and review cannibalisation of stores where too many exist within a 1km radius and determine whether some should be closed.

In terms of Metro/Express, I recommend transforming them into Tesco Finest and Tesco value (no frills approach to compete with discounters) as well as Tesco local stores based on their current locations and socio demographics catchment area

4. Utilise linear space more efficiently

Re-design hyper and super markets to promote value products and high end brands in better designed sections of the store. Make the stores warmer and more interesting to shop, and allow customers a much easier experience to shop quickly and efficiently. I also recommend to maximise hyper and super stores existing space, through strategic partnerships with external partners such as travel companies, gym operators, and other services where that location can accommodate such a change.

5. Define a new set of promotions

Establish better in store promotions of the value ranges giving them a more dynamic feel and identify to promote quality and value. The aim is to ensure customers trust “white label” brands as much as “branded”.

6. Develop strategic alliances

Tesco should consider getting into a strategic alliance with Kuoni or Virgin travel and offer those travel agents shop space with discounted travel possibly 2.5-5% off holidays for Clubcard owners.

7. Restoring investor confidence

The company’s overstatement of profit is clouding the company at the moment. After recent events, they need to take very strong action to try and ensure that they don’t fall out of favour with the people who are investing them. The recent dividend may have short term ramifications however long term benefits as they are signalling restructure.

8. Invest in innovation and new technologies to gain a competitive advantage

Recommend investing more in the online platform by creating a responsive design that will allow m-commerce to grow significantly. Also need to roll out click and collect to all stores and invest further

As I mentioned at the beginning this is factive work but a worthwhile exercise for any company to do when setting up its strategy.

Benoit Mercier

Platini out can only be good news


Well this week, as a huge football fan, I got the news that I have been wanting to hear for a very long time, Platini is out of the FIFA presidency. Everyone will know that I have a huge dislike for Platini, Blatter and FIFA in general. Would I want to work for FIFA, no doubt but as David Gill proved not with this current lot!

Back in June, Ian Brammer from the Times published a well written example about the scandal that hit FIFA in five points. I thought I would add a sixth

The U.S. cracking down on international football’s governing body looks like a recipe for geopolitical disaster. Fortunately, the only thing the world hates more than American unilateralism is corrupt officials compromising the integrity of the world’s most popular sport. These five facts explain the FIFA scandal and the geopolitical implications of this growing story.

1. Sepp Blatter

Nine FIFA officials were indicted last week by the U.S. Department of Justice for taking $150 million in bribes while awarding FIFA broadcast rights. This kicked off a Swiss investigation into the bidding process for the 2018 Russia World Cup and the 2022 Qatar World Cup. Since the story broke last week, FIFA president Sepp Blatter has managed to win reelection and then resign his post.

For years the worst-kept secret in sports was FIFA’s extensive ‘patronage’ system. Blatter is accused of using FIFA development money, earmarked for promoting soccer in impoverished nations, to secure votes and general support for his initiatives. FIFA generated nearly $6 billion over the last four years—that’s a lot of money to work with.

2. Africa

Each of the 209 FIFA member nations casts a single vote for the body’s president. This system gives smaller countries outsized influence—a vote from Lesotho weighs exactly the same as a vote from Germany. When news broke of the DOJ investigations, the African Bloc and all of its 54 members immediately announced their support for Blatter and the current system.

Some African countries have more skin in the game than others. U.S. investigators have accused South Africa of paying $10 million to secure rights to the 2010 World Cup. The South African response? “We have fought colonialism and defeated it, and we still fight imperialism,” proclaimed Fikile Mbalula, South Africa’s minister of sport. A tournament that netted just $500 million for South Africa after $4.6 billion were spent in preparations may well prove more trouble than it was worth. In fact, there is scant evidence that hosting major sports tournaments ever pays off economically for countries.

3. Russia

Yet some countries happily pay the high costs of hosting in exchange for the prestige it brings—and some governments are even happy to foot the bill for the distractions these selections bring. Take Russia, which is having a particularly rough year. Oil prices, on which Moscow is highly dependent, have dropped 48% since last June; the ruble has lost nearly half its value since the beginning of 2014; Western sanctions have sent food prices soaring across the country. Vladimir Putin needs the 2018 World Cup to boost morale, tourism and investment, and Russia is set to spend $20 billion on public works projects and stadium preparations. The good news for Putin: despite the unfolding FIFA scandal and the light it will surely shine on Russia’s bid for the event, it’s probably too late to strip Russia of the World Cup.

4. Qatar

The 2022 games are another story. Qatar is so heavily invested in their World Cup hosting duties that its stock market dropped 3 percentage points on news of Blatter’s resignation. Qatar is expected to spend about $200 billion over a 12-year period upgrading its infrastructure and building stadiums.

The Swiss investigation puts all that in jeopardy. Prosecutors have reportedly uncovered emails that show Russia and Qatar supporting each other’s bids, perhaps with bribes. Qatar needed the help—this is a country that averages 105-degree temperatures in June and has a strict no-alcohol policy. A football fan’s paradise, in other words.

Hosting an international sports event like the World Cup is a big deal for this nation of 2 million. The Qatari response to the ongoing FIFA scandal? “Is it because it is an ArabIslamic small country? That is the feeling of the people in the region,” opined Sheikh Abdullah bin Nasser bin Khalifa Al Thani, the Prime Minister of Qatar.

5. America

Given all these sensitivities, it’s surprising how well much of the world is taking this U.S.-led assault on world football’s governing body. Perhaps that’s because just 6% of Americans say soccer is their favorite sport—the perception that Americans don’t care about soccer gives Washington and the DOJ some semblance of objectivity in these proceedings.

Yet it isn’t realistic to think that, when it comes to organizations like FIFA, sports can ever remain separate from politics. No sovereign power oversees FIFA so its members must essentially govern themselves, leaving countries to investigate highly sensitive activities involving other countries. But for many Americans, there is a silver lining: scandals involving international bureaucrats are a lot more fun than watching soccer.

I will now add a sixth point…

6. Platini

Platini has advanced several unconvincing explanations for how £1.3million of FIFA’s money ended up in his pocket nine years after he had supposedly earned it, but nobody is buying his story.

The Frenchman also faces other uncomfortable questions, including his vote for Qatar when the Gulf state secured the 2022 World Cup five years ago.

He also courted controversy over his refusal to hand back a watch worth more than $25,000 that was gifted to him by the Brazilian Football Confederation at last year’s World Cup. “I’m a well-educated person. I don’t return gifts,” said Platini after FIFA called for all watches given to executive members to be handed back over a breach of ethics rules.

What next?

I have been in the industry long enough to know that there are good people but also a lot of dishonest people. One would say it is only natural when you deal with billions of pounds contracts, everyone wants a slice of it. But as a fan, how could I (we) accept it. Only recently, we decided to witch hunt bankers for their bonuses structure, well it is only right that we now do the same with football.

If I was going to be in charge of turning around this business, here is what I would do right away, amongst other urgent priorities:

  1. All FIFA Executive and Non-Executive members would be sacked.
  2. No more vote for each football associations
  3. Elect a new committee every four years (end of each World cup cycle)
  4. Enlarge the committee to have an equal amount of fans, football players/managers, business/legal representatives
  5. Have a true and fit for purpose audit independent committee
  6. Like any true corporate governance, salaries should be made transparent

Many of you will feel the above is utopia but every revolution has got a start and I feel that somehow, football is at the start of it’s.

Benoit mercier

Inditex sales up 16% to €14.74bn in first nine months of 2015


There are some retailers out there that do really well and Inditex is one of them. My wife loves Zara and raves so much about their stores and products. I got curious and decided to take a closer look at the group that owns them.


Inditex SA, the world’s largest clothing retailer, which dates back to 1963 when it started life in a small workshop making women’s clothing. Today it has over 6,900 stores throughout the world. Years later, to the launch of the first Zara store in 1975. This was followed by the brand’s international expansion at the end of the 1980s and the successive launch of new retail concepts: Pull&BearMassimo DuttiBershkaStradivariusOyshoZara Home and Uterqüe. They have an impressive 140,000-strong workforce and more if you include the indirect people they employ though their supply chain.

Corporate Governance

They have 7 Non-Executive Directors, 1 Executive Director (Chairman & CEO) and 1 affiliate. They have an Executive Committee but as you would expect, the Audit Committee is made of Non-Execs. A typical setup.

Financial Analysis

Tool: Inditex Interim Nine Months Results

Inditex reported the fastest profit growth in more than two years as the Zara owner opened more stores and benefited from the weak euro. This trend continued in the first nine months of the year with another set of string results.

Income statement analysis

Based on a vertical and horizontal analysis, the net income grew by a huge +19.7% vs. LY and accounted for 13.7% of the net sales, which is +0.7%pts vs. LY. This is a phenomenal achievement when taking into account the macroeconomics pressure.

The common-size income statement shows that inditex had a strong performance in the first 9 periods of the year. Net sales grew by +16% in line with their costs of sales (+16.4%), which meant a respectable increase in gross profit by +15.7%.

The growth in net income is due to tighter control over their operating expenses, which grew by only +14.6%. Interesting that inditex’s results from companies consolidated by equity method grew by +135%. fyi An accounting technique used by firms to assess the profits earned by their investments in other companies. The firm reports the income earned on the investment on its income statement and the reported value is based on the firm’s share of the company assets. The reported profit is proportional to the size of the equity investment. This is the standard technique used when one company has significant influence over another.

Finally, for shareholders, one of the key metric will be to look at the Earning per share ratio, which grew by +19.7%. Looking at the last 5 years growth it has been amazingly linear and a fantastic ROI.

Balance sheet analysis

Overall, very healthy.

The most important factor for any business is to have cash. You may have the highest turnover in the world, if you have no cash coming in you will go bust. Remember, sale is vanity, profit is sanity and cash is king! In the case of Inditex, its cash position grew by +37.3%.

Their account receivable also dropped by -26.2% meaning that clients are paying their debt faster than LY. One to watch out is their inventory, which grew by +12.5% but as a % of total assets, it actually dropped by -0.5%pts and their merchandising team would have been busy keeping a tight control over it.

In order to drive their net sales, they have had to invest in tangible assets (includes the likes of machinery, buildings and land). This grew by +15.8%.

Another big one to watch out is their current liabilities has they grew by +23.3% (higher than their income) and +1.9%pts of its total liabilities. It is interesting to note that their account payable grew by +22%, which we know is not down to a cash flow issue and therefore, I can only assume that they exerce more pressures on their suppliers and have negotiated long lead time in terms of payments.

Financial ratios

There are many ratios I could focus on but i have decided to look at the basics that you should know before investing.

  • Current ratio: 1.52. A ratio under 1 indicates that a company’s liabilities are greater than its assets and suggests that the company in question would be unable to pay off its obligations if they came due at that point. This is not the case for Inditex. However, a high ratio (over 3) does not necessarily indicate that a company is in a state of financial well-being either. Depending on how the company’s assets are allocated, a high current ratio may suggest that that company is not using its current assets efficiently, is not securing financing well or is not managing its working capital well. To better assess whether or not these issues are present, a liquidity ratio more specific than the current ratio is needed.
  • Quick ratio: 0.99. The quick ratio measures the euro amount (in our inditex case) of liquid assets available for each euro of current liabilities. Thus, a quick ratio of 0.99 means that a company has 0.99 € of liquid assets available to cover each 1 € of current liabilities. The higher the quick ratio, the better the company’s liquidity position. Also known as the “acid-test ratio” or “quick assets ratio.” In this case, this is a breakeven situation and I feel that it is a good result even though above 1 would be better.
  • Cash ratio: 0.86. It improved by +11.6% vs. LY. The cash ratio is the most stringent and conservative of the three short-term liquidity ratios.Very few companies will have enough cash and cash equivalents to fully cover current liabilities, which isn’t necessarily a bad thing, so don’t focus on this ratio being above 1:1. Again for inditex this ratio is a good result.
  • Inventory turnover in Days: 157 days, which is an improvement from 162 days LY. This ratio to make sense needs to be compared against industry averages. (Sorry I don’t have any but feel free to share)
  • Debt ratio: 32.4% vs. 30.44 LY. Inditex has grown its debt and therefore is taking bigger risks. it may not be a bad thing but this metric is to watch out. Having debt is not an issue but it is the level of bad debt that is. No concern for me
  • Gross margins: 58.74%, which is flat on LY. Again stabilising margins when raw materials and labour costs are going up is a great result.
  • Net cash flows: 1,798 (€m) – please note that I have not included dividend payments as we would have to wait for the year. the reality is that it is positive and therefore healthy
    • Cash flow from operating (CFO): 3,543 (€m)
    • Cash flows from investing (CFI): -897 (€m)
    • Cash flows from financing (CFF): -848 (€m)


Overall: Invest

My recommendation is to invest in inditex as they have very healthy looking accounts and I believe that they have a lot more opportunities to come, especially internationally. Also, because I cannot help it, because my expertise lies in eCommerce the least I can say is that I am not a big fan and UX/UI is really poor in my opinion. I feel that they have a huge opportunity as far as Zara is concerned. A bon entendeur salut!

Benoit Mercier


Global and UK economy outlook 2016

As noted on the BBC’s website, The World Bank has warned of new threats to efforts to reduce poverty in the developing world and The Bank forecasts only a modest increase in growth.

The World Bank does think that global economic growth will pick up this year. If I were a betting man, I would doubt it. Why?

  1. We are still recovering from the Great Recession, which followed the international financial crisis and this is because…
  2. …the US. The Federal Reserve finally raised its main interest rate target from the level of practically zero it has had since the end of 2008. It’s likely to lead to higher borrowing costs, and lower currencies, because money will be moved to the US to benefit from the rising interest rates there. That in turn will make it more expensive to repay loans in dollars. And the issue is that the dollar is the world currency, 75% of world transactions, ouch an expensive prediction!
  3. …China’s slowdown and uncertainty. China was seen as our saviour and an economy that was tipped to overtake the US. Has it happened? To some extent it has moved in that direction, but in a country that likes to regulate its markets, the recent slowdown, which began around the start of the current decade, demonstrates to me that more volatility is to be expected. Tthe question has been: will it be a smooth transition or not, a hard or soft landing? So far, no crisis, though there have been some sharp stock market falls in China. There were several weeks of volatility in the middle of 2015 and trading for this year got off to an inauspicious start, with a fall of 7% in Shanghai and trading suspended.
  4. The oil price. Last time that the oil prices were low, we know where it took us…The Great Recession. The key question is when will it spike back up again and pinch consumers spending!
  5. Emerging markets. The IMF predicts that growth for emerging and developing economies will pick up this year, from 4.0% to 4.5%. Not enough to boost the world economies!

In a nutshell my glass is more half empty than half full, let’s hope I am wrong!

Benoit Mercier