Attempting to square the virtuous circle
Thursday 14 August 1997
Scenario B: An overvalued exchange rate. Windfall gains fuelling a high street spending binge. Company receiverships running at 1989 levels. A bull market about to run out of steam. R-Reg mania. Oh dear. Better get the holiday to France in now. Recession around the corner.
Yesterday's unemployment figures, showing a 50,000 drop in the jobless total in July, were better than anyone had a right to expect. What made them even more impressive was their publication alongside figures showing an absence of any inflationary wage pressures with the rise in average earnings stuck firmly on a plateau.
Conventional wisdom says that when labour markets tighten, pay packets go up, fuelling consumption and hence inflation. The latest figures would suggest, however, that Britain may at last have broken the link with the help of its flexible labour markets created by the reforms of the last 15 years.
They are certainly happy around at the Bank of England following last week's quarter point rise in interest rates. The Bank's latest Inflation Report pronounces itself satisfied that the Government's 2.5 per cent inflation target is now in range without the need for further fiscal tightening.
In truth, the picture is less clear and arguably less benign than that. As the Bank itself concedes, the risks to its central projection of inflation lie more on the upside than the downside, suggesting that further rate rises will be necessary.
In the markets it is a mixed bag. The foreign exchanges seem to have bought the line for now that sterling is no longer a one way bet. But the equity markets seem less persuaded that the inflationary tiger has been tamed judging by the way the Footsie is nudging back down around the 5,000 mark.
Meanwhile the unemployment totals have been massaged so many times that comparisons spread over 17 years start to become meaningless. There have been twice that number of changes in the way the figures are calculated in that time.
It may be way too premature to start talking up a recession. But it is equally far too early to conclude that the boom bust cycle is a relic of the past.
Midshires whets the carpetbaggers' appetite
And then there were 71. Birmingham Midshires' capitulation to the Royal Bank of Scotland means that the building society movement has now shrunk in number by a half in little more than 10 years. It looks like becoming slimmer still since the carniverous appetites of the RBS will not stop here.
Nationwide's valiant refusal to convert to a bank begins to look like the last twitch from the dying body of mutuality. But perhaps all is not lost.
Birmingham Midshires has been walking about with its skirt around its waist for two years trying to tempt some passing bank. In the process it has sucked in 300,00 carpetbaggers more interested in getting a bung than a building society from their deposits. Yesterday they struck gold and never mind the thousands of ordinary savers who will see the wealth created over several generations frittered away in another windfall.
The blatant manner in which the society was fattened up for conversion contrasts starkly with the explanations trotted out yesterday by its chief executive Mike Jackson as to why mutuality is being forsaken.
All that Birmingham Midshires had done was listen to its members and conclude that they deserved a wider range of services than a building society could offer. Apparently its 1.2 million members find it a chore having to open separate bank accounts and buy life assurance elsewhere.
Never mind, they will get their pounds 700 bung and Mr Jackson will get a plum job with the parent company if he wants it along with the chairmanship of the society.
What next? Well, there are a whole raft of middling building societies a great deal more wedded to mutuality than Birmingham Midshires who could be next in line, starting with the Britannia, the Norwich and Peterborough, the Bradford and Bingley and the Portman.
The last of these could make a particularly tasty second helping for the RBS since the Portman would neatly fill the geographic bits still missing from the jigsaw once Birmingham Midshires has been consumed.
Let's hope they are made of sterner stuff than the Brummies. For Birmingham Midshires' borrowers, the bung will probably only offset the higher mortgage rates they have been charged compared with say the Nationwide. After conversion they will be ripe for worse plunder.
Time-bomb is ticking for Littlechild
As the clock ticks down to domestic electricity competition next year Professor Stephen Littlechild looks increasingly like he is sitting on a time-bomb. He is already at loggerheads with the companies over how much of the cost of introducing competition they can pass on to customers. The prof says less than pounds 400m, the industry wants pounds 850m, and neither side is budging an inch.
Not content with that, he has decided to declare war on two further fronts. According to the RECs the new supply price controls would turn a low profit business into a no profit business, just as the regulator is trying to attract new competitors into the market. No surprise then that the Tescos, Sainsbury's, BPs and Shells of this world have turned their noses up at such thin pickings.
It is no surprise to hear privatised utilities squeal when a regulator turns the screw on their earnings. But given that electricity supply only accounts for 7 per cent of bills, it looks as they may have a point this time. The answer, of course, is for RECs to merge their supply operations, leaving separate companies responsible only for the distribution monopolies. Discussions between RECs are taking place, but this raises a whole new can of competition worms.
If the professor is really determined to bring down electricity bills he should launch a full-scale review of the generation market, which has now been freed from price regulation. Instead he has approached the issue by the back door in the supply price control proposals, suggesting that generation costs will fall, without saying how. The messy approach has left the RECs and generators fighting with the professor and with each other. The sooner we have a complete review of electricity prices, in all their complex guises, the better.
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