July 2014 |

Canary song

The headline on a capital markets report looking at bond yields was worrying: “Canary in the coalmine”. Canaries were useful to miners because, although small, they sing sweetly until they get a whiff of gas and then they abruptly stop singing. The miners say a short prayer for the little bird, then get out as fast as they can.

It seems perverse to issue a headline laden with such dread at a time when the newspaper versions are far more positive about the economy. It’s right, though: we should be looking for the numbers and the trends that warn against over-optimism – and encourage us to be ready for a sudden change in the economic climate. After all, if the past ten years has taught us anything, it’s that the world can turn on a dime.

So what are the canaries singing about? And what might cause them to stop?

Well, let’s get the obvious ones out of the way. The aftershocks from the 2008 financial crisis are still being felt. Worries over Portuguese banks and the ongoing problems in neighbour Spain (“turning a corner”, but still with 25% unemployment) are justified.

Next, rate rises. In the UK, Bank of England governor Mark Carney has been giving us a masterclass in teeth-sucking and equivocation. Rates wouldn’t rise until inflation was tamed; ah, but then not until unemployment was down; and, now we think about it, not unless workers are getting proper pay rises, and productivity is going up. But there’s only so long this can go on.

(That’s also true in the eurozone, where negative interest rates for deposits at the ECB is surely a canary warning about something).

And in the US? Strong jobs numbers on top of a confident economy (although confidence is a relative thing, as this Gallup poll shows…) have pushed most experts to predict a rise sooner rather than later. Then there’s inflation. For the five months to the end of May, US consumer prices rose 2.1% – an annualised rate of 5%.

Global consumers, in other words, are being pulled in two directions. On the one hand, phew, we finally seem to be out of the long period of stagnation. On the other, we’re kind of worried we didn’t fix the structural problems that caused it – and the stimulus, loose monetary policy, asset bubbles and personal indebtedness remain worrisome.

Is the canary coughing yet? Consumer confidence remains relatively high for now. But smart companies know this can change quickly, and issues like wages (in the UK), unemployment (in the EU), bank crises and especially inflation are a sure way to dent their spending.

The priority now is to “mend the roof while the sun is shining” – something many governments didn’t do ten years ago, but which companies should now. It’s about measures to shore up profitability in the face of inflation; flexibility in operations, protecting against shifting consumer sentiment; and innovation, which remains the very best way of diversifying revenue streams and retaining a competitive edge.

Smart procurement, of course, can play a role in all three. Managing third-party costs – which eat up more than two-thirds of corporate revenues, on average – directly boosts up the bottom line. Sensible outsourcing and well-managed supplier relationships offer real flexibility. And a strategic approach to the supply chain allows companies to exploit and enhance innovation from their entire business ecosystem.

Crucially, all of these work to benefit business even if the canary remains sitting happily on its perch, chirruping sweetly. Here at Proxima we’re enjoying the sound of its song; and we know exactly what we’re going to do if it stops.