King stays on bright side

By Daily Mail Reporter
Updated: 19:00 EST, 12 February 2003

 

THE recent cut in interest rates to 3.75%, the lowest level since 1955, may not be the last. All the factors which drove the Bank of England's decision to take what governor-designate Mervyn King describes as 'pre-emptive action' - a weakening world economy, tumbling business investment and falling share prices - remain in place.

In fact, with the increasing war tensions there is good reason to believe that the economy will get worse before it improves.

The Bank has shaved its growth projections and also made clear that in the current circumstances, when higher prices are the result of a temporary rise in petrol prices and the housing market, there is no immediate concern about exceeding the government's 2.5% inflation target.

Despite what came across as a generally gloomy presentation, with almost every economic indicator except inflation moving in the wrong direction, Professor King was in no mood to give his rebellious students in the financial press the benefit of the doubt.

He gave us a wigging for the use of words such as 'slump' and suggested that headline writers 'have lost a sense of reality'.

In some respects King is right. After all, growth in 2002 of 2.2%, although hardly spectacular, was a decent outcome. The latest jobless figures - just released - show that the numbers of people claiming benefit is down to the lowest point since September 1975 and unemployment levels fell to 1.5m in the final quarter of last year.

But that is just part of the tale. What the detailed numbers also show is that the number of people employed in manufacturing is 4% down on a year ago, at a time when jobs in the public sector rose by 2.1% over the last year to 7m. This drove up average earnings in the public sector by 4.6% in December against 3.7% across the whole economy.

One part of the economy which is clearly suffering is the financial sector with shares down 10% since the Bank of England's last inflation report, casting a pall over the insurance sector and the City.

The Bank acknowledges that weakness in equity prices was a key factor in its decision to lower interest rates, although it insists its decision was taken because of the impact on growth and inflation and should not be seen as reflecting worries about financial stability.

What is disturbing about the Bank's projections for the future is the lack of clarity about where growth is coming from. It expects the sizzling rise in house prices to fizzle out over the next two years and consumer demand to come down with it.

But since so much of the consumer-boom has been funded by equity withdrawal - people borrowing against the rising value of their homes - there is a real potential for a sharp downturn (or dare one say slump?) in consumption.

That begs the question as to where future growth will come from. It will need a considerable turnaround in business confidence and investment to drive output forward in the coming months, but that cannot be guaranteed with the overhang of war. So one still has the feeling that the Bank is too cheerful.

Financial markets are already pricing in a further cut in interest rates, perhaps as soon as this spring. This may be miserable news for the army of savers. But as governor-designate King is keen to point out, the last base rate reduction should not have been a surprise to anyone who was keeping an eye on sterling interest rates.

Biggam to the rescue

SO now we have seen the Higgs report in action. The voice of the all-powerful senior non-executive director at BAE Systems, Sir Robin Biggam, has been heard and all the speculation about the future of senior executives - chairman Sir Richard Evans, chief executive Michael Turner and finance director George Rose - has been laid to rest.

Reports of divisions in the ranks, Sir Robin tells us, have been greatly exaggerated.

This is the kind of weak endorsement of management normally heard from the chairmen of football clubs a week before the axe is wielded.

Sir Richard and company may have bought themselves some extra time at Tuesday night's crisis session of the board, but disgruntled shareholders are unlikely to leave matters there.

They believe that the current poor relationship between BAE and its main British customer, the Ministry of Defence, is unstable and that it will require changes at the top to restore confidence in management and financial husbandry.

As Britain's main aerospace and technology group, BAE cannot afford second best for very long.