Meltdown was avoided, but there were plenty of hairy moments, writes Hilary Clarke
NO ONE in the world of business expected 1998 to be an easy ride to profit. The economic crises in Japan and the rest of Asia were already well under way by January, casting an ominous shadow over global growth and prosperity. The pound was unhealthily strong, for manufacturers at least, making British goods more expensive abroad. Interest rates were comparatively high. There was already talk of an impending global recession.

In the event, 1998 proved to be even more dramatic for the global economy than most people had predicted, not least on the couple of occasions last year when the world's main stock markets appeared to be heading for a meltdown. Few commentators could have foretold the Russian economic crisis in August which led that country to default on its debt and sent the world's banking system into turmoil. Commodity prices were expected to fall as a result of the Asian economic collapse, but not many anticipated the price of oil falling to $10 a barrel, the lowest for 25 years. Even diamonds do not seem to be worth much any more.

Yet, as the year comes to a close, perhaps the most remarkable thing of all is how well the British economy has done. Global capitalism has held its ground, albeit with the help of billions of dollars in bail- outs from the International Monetary Fund.

"Despite all the shouting and screaming things have held up pretty well," said Lord Levene, Lord Mayor of London and chairman of Bankers Trust in Europe. "The most encouraging thing of all is that, despite all this collapse, the markets seem to have taken it in their strides, which is a good indication of the maturity of the world's financial markets." Indeed, City economists still expect the economy to record expansion of around 2 per cent over the last 12 months.

"As far as the UK economy is concerned, the big surprise is that interest rates have fallen as far as they have done," said Adam Cole, an economist with HSBC James Capel. As late as August, many City economists were anticipating another interest rate hike following the surprise increase in June. Rates at the beginning of the year were 7.25 per cent; they peaked at 7.5 per cent in June and ended the year at 6.25 per cent after three successive cuts. That is good news for British homeowners who saw the cost of their mortgages fall while house prices defied forecasts and continued to rise.

THERE HAVE, of course, been some notable casualties; Martin Taylor, for one. The former golden boy of British banking resigned suddenly as chief executive of Barclays Bank in November, under a cloud after he failed to persuade the board to end the bank's unfortunate foray into capital markets. Barclays got burnt more than most banks over its exposure in Russia. "It was a tumultuous year for banks," said Bill Dalton, chief executive of HSBC Midland, the high street bank that changed its name to HSBC this year. "We had Russia, Asia, the collapse of hedge funds and the troubles of the UK manufacturing sector. There were times when life seemed normal and other times when we just thought `Oh God'."

British Airways' planned alliance with American Airlines was another victim of the global economic turmoil. Although the official reason for ending the link-up was the harsh conditions imposed on the two airlines by Brussels regulators, the downturn in Asia and elsewhere was the real reason for BA's chief executive, Bob Ayling, stalling the deal.

Other notable corporate victims of 1998 included the reputation of that stalwart of British business, Marks & Spencer. It was the first company to report that trading conditions on the nation's high streets were becoming difficult. The term "blood-bath" was even used. And its reputation for sound corporate governance was severely knocked by an acrimonious boardroom feud over the search to find a replacement for its chairman and chief executive Sir Richard Greenbury. The clothing retailer Next had a bad year, too, as losses forced it to close its overseas stores. Sir Brian Moffat, chairman of British Steel, will also want to forget 1998 as soon as possible. The bellwether of British manufacturing dropped out of the FTSE 100 share index in 1998 and watched helplessly as a glut in world steel production and the strong pound eroded its profits.

But there were also corporate winners, especially in the telecommunications and information technology sectors, where shares continued to perform well despite the chaos going on around them. Colt Telecom, the phone operator specialising in fibre-optic connections, is an example. The company entered the FTSE 100 in September - not bad given that it is not expected to become profitable until 2002. IT companies such as Logica and Sage managed to produce sparkling profits despite the downturn.

Perhaps the most significant corporate trend of 1998 was the extraordinary number of mega-mergers on both sides of the Atlantic as companies sought to protect themselves from the global economic fallout by cuddling up together to cut costs and maintain market share. The rush to forge alliances with former enemies was most pronounced in those industries where the global crisis was biting hardest, leading many commentators to interpret the rush to form joint companies as a sign of weakness rather than strength. Amid a background of dismally low oil prices, British Petroleum surprised everyone when it announced in August it was joining forces with Amoco of the US to form the UK's biggest industrial company, with a market capitalisation of around $42bn. That triggered a spate of other mergers in the oil industry including the takeover of Belgium's Petrofina by Total of France, and Exxon and Mobil's announcement that they, too, planned to join forces.

There were also major mergers on the international banking scene, including Bankers Trust's decision to tie the knot with Deutsche Bank to create the world's biggest financial institution. America's Citicorp merged with Travelers Group to create the world's largest insurance company. On the Continent several European banks also joined forces, although a significant banking merger failed to materialise in the UK amid concern it would be thwarted by the competition enforcers at the Monopolies and Mergers Commission.

ALL THESE mergers were, of course, music to the ears of investment bankers, who managed to fill their pockets by underwriting all these deals despite the difficult global conditions. What does it matter to them if those deals subsequently fall apart amid ego clashes and falling share prices, as did the proposed alliance between the drugs companies SmithKline Beecham and Glaxo?

The biggest victims of the tumultuous events of 1998 were, sadly, the emerging economies of Eastern Europe, Asia, Latin America and Africa as investors, frightened by events in Russia, rushed to the traditional safe havens of Europe and the US. As a result, the numbers of proponents of capital controls swelled in 1998 to include the likes of the multimillionaire speculator George Soros. Even the US President, Bill Clinton, began to hint at the need for international capital market reform. Around $3bn was spent to bail out Long Term Capital Management, the hedge fund that collapsed under the weight of the global financial turmoil. No wonder some people began to question if there were not better ways to use their cash.

But as Europe's business elite raise their glasses to herald in 1999 on Thursday evening, relieved that total financial collapse had been avoided, there is one unsung hero that probably deserves the biggest toast of all. The single currency, not due to become official tender until 4 January, was effectively born earlier this month when European central banks acted in unison and cut their interest rates to 3 per cent, therefore setting a single rate for the whole euro zone. At the beginning of the year, the global financial crisis threatened to scupper the most ambitious project of its kind ever. In the event, the prospect of the single currency protected the economies of mainland Europe from the worst of the economic crisis. And that is good news for the City of London, which is still poised to be the biggest centre where the euro is traded as from next week, even though the UK has not yet made up its mind whether to throw sterling into the Euro pot as well.