After seven fat years, there must be a slowdown

COMMENT: 'Nobody would seriously argue that the world is heading for depression, but the 1929 factor shouldn't be wholly discounted'
Better late than never is a good motto most of the time, but not when it comes to stock market corrections. The earlier an overvalued market returns to earth, the better. In that sense the slide on Wall Street and Nasdaq is a good thing. US stocks never warranted the heady ratings they acquired, and, wild gyrations apart (by the look of events yesterday, we could be talking a bungee-jump crash here), if the slide does not go too far too fast, it is hard to see a problem.

There is, however, a rather more sinister interpretation of events. Financial markets are meant to be forward-looking things. The present uncertainty could therefore be about more than just inflated valuations. Although it seems perverse when the Federal Reserve is expected to raise interest rates to slow demand, the markets are in part anticipating a turn in the cycle, possibly even recession in the US economy. It is too early to predict exactly when, how long, or severe the next recession might be. But it is clear that, after seven fat years of expansion, there will have to be a slow-down of sorts.

A big correction on Wall Street might also undermine consumer confidence in a way that would compound other recessionary tendencies in the economy. Small investors have been pouring money into the stock market as if there is no tomorrow. The inflow via mutual funds reached nearly $150bn in the first half of the year. This matters to the economy in a way that the much greater long-term investment via pension funds does not. This pension money can ride out a fall in share prices. By contrast, a drop in the value of mutual funds will directly hit consumer spending as many Americans think of them as roughly equivalent to bank accounts. The vague sense of unease that falling share prices generate could translate directly into a drop in consumer confidence and spending. The level of consumer debt in the US is such that even a small decline in earnings from equity funds could trigger severe belt-tightening.

The October 1987 crash had far less impact on the economy than anybody expected at the time. Central banks eased interest rates to compensate for effects that never emerged, stoking up the boom in 1988-89. Extensive mutual fund holdings are the key reason the correction of '96 might turn out to be worse for the economic outlook than the crash of '87. The nightmare scenario is that it would become like the great crash of 1929, when the losses sustained by small investors helped contribute to the ensueing depression. Nobody would seriously argue that the world is heading for depression, but the 1929 factor shouldn't be wholly discounted.

Why the BBC must try harder

Everytime the BBC makes any kind of corporate announcement, the latest being the release of the annual accounts, the same old questions are invariably asked; whither the BBC; should it turn itself into pay-television and radio; why not run the BBC on a fully commercial basis, leading to eventual privatisation? Or should not the BBC become just a programme producer selling its material to commercial broadcasters and distributors?

Most of these questions are for the time being largely irrelevant, for the Government has decided to keep the licence fee at least until 2001, half-way through the BBC's present charter. That's not far away, however. Any significant erosion of the BBC's market share in the meantime further weakens the case for the licence fee. So for John Birt, who wants not just its continuation but quite chunky increases as well to help fund his launch into digital, the argument starts here.

Judging by yesterday's accounts, he is not making a bad fist of it. The evidence is that the Birt reforms are beginning to work - the Corporation is getting more for less, more programming for less money. With a golden year of production under its belt, it is also making headway against independent television, which itself begins scarcely to justify the term "public service broadcasting."

But whether fear for the future alone can continue to drive the efficiency gains the BBC desperately needs if it is to fight off the ever onwards and upwards march of pay TV remains to be seen. Last year the Corporation took about pounds 100m out of its costs, which by the BBC's standards is progress of a fairly dramatic kind. By commercial standards, however, it is not much at all. It is less than 5 per cent of last year's expenditure. Compared with the sort of efficiency gains the regulator expects of British Gas, it is peanuts.

Mr Birt is doing well, as his pounds 300,000 of salary and bonuses attest, but he has to try harder. His funding has to grow by a lot more than 5 per cent a year if he is to make a decent fist of digital and outbid pay TV in the battle for audience pulling product. Without the big stick of price regulation, or the even more powerful stick of competitive forces, getting efficiency gains is like squeezing blood out of a stone. But if the licence fee is to continue justfying itself, that is what Mr Burk has to do.

Another soft landing for BAA

The Civil Aviation Authority has again demonstrated its ability to defy gravity when its comes to regulating the monopoly that BAA enjoys over airports in the South-east of England. While every other watchdog in the land is busy making life harder for its regulated monopoly, the CAA is intent on making things easier for BAA by relaxing the charging regime at Heathrow, Gatwick and Stansted.

In fairness to the CAA, it must be said that BAA's charges are absurdly low. There are only a handful of airports aound the world into which it is cheaper to fly and if the CAA's latest price curbs are accepted, the already overcrowded Heathrow and Gatwick will become cheaper than even the likes of Bombay and Algiers.

Under the CAA's proposals charges at the overcrowded airports of Heathrow and Gatwick will fall in real terms by 3 per cent while they will rise by 1 per cent at the under-utilised Stansted. In a sane world it would be the other way around with charges increased to ration capacity at Heathrow and lowered to divert traffic to airports like Stansted. Unfortunately airport economics do not work quite like that. The average charge for landing a passenger at Heathrow will fall by about 60p to pounds 4 under the CAA's proposals. But to choke off the never-ending rise in Heathrow's traffic the CAA estimates it would have to increase charges to pounds 50 a passenger. In any event the CAA is precluded from considering environmental issues - such as the desirability of curbing noise levels when setting a new price formula. Since the regulatory regime cannot be used to control Heathrow's helter-skelter expansion, the Government should consider other approaches. One would be to auction off Heathrow's take-off and landing slots, ensuring a valuable resource was used more efficiently before being added to through the environmentally-objectionable expedient of building Terminal 5.