Bears growl as pause for growth turns nasty

COMMENT: `The threat now is that a rundown in excess inventories will bring the economy shuddering to a standstill in the first few months of 1996'
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As the markets pack up for Christmas, City economists have been sending unseasonal greetings for the new year. Analysts have been vying with one another for the most bearish forecast of growth in 1996.

Ten days ago, the average independent prediction for growth in 1996 was 2.4 per cent, down from 2.7 per cent in November. The cascade of downward revisions which started when Goldman Sachs cut its forecast to 1.7 per cent continues. James Capel, one of the more bullish houses, has just come down from 3 to 2.5 per cent. Morgan Stanley now expects 2.2 per cent.

The "growth pause" that started in the spring is turning nasty. What little expansion there was in the second and third quarters - equivalent to little more than half the 2.5 per cent underlying rate of growth in the economy - was largely accounted for by a big build-up in stocks. The threat now is that a rundown in excess inventories will bring the economy shuddering to a standstill in the first few months of 1996. Indeed the fall in imports from non-EU countries in November - concentrated in semi- manufactures - suggested that this process has already begun.

The new City consensus is that the economy will bounce back after this inventory correction. As James Capel puts it: "1996: spring chill, summer thaw." The main motor of expansion is expected to be consumer spending, as consumers splash out from rising real incomes lifted by tax cuts. The Treasury expects an additional boost from a rundown in savings.

Consumers did raid their piggybanks in the third quarter, but taking the first nine months of 1995 as a whole, the ratio of personal savings to disposable income has remained unchanged. For a sustained fall in the savings ratio to occur, there will have to be a real pick-up in confidence.

There are some signs that this is occurring - for example, the green shoots of a housing market recovery, the rise in purchases of vehicles in November. However, there is a real danger that the inventory correction could build on itself. Confidence would be hit hard if manufacturers were to lay off workers while meeting demand from stocks. Even if they don't, it is hard to envisage consumers really coming out of their shells while indebtedness remains so high and worries about job insecurity persist.

The worldwide background is hardly encouraging. Although exports picked up sharply in November to countries outside the EU, there is a strong likelihood that exports to the EU - for which the last information was for September - have been suffering. With the German economy also undergoing an inventory correction and the French economy afflicted by the effects of the strikes, the immediate prospects for exports to two of our main trading partners look bleak. The Treasury's forecast of overall growth in exports of just over 7 per cent in 1996 - this after less than 6 per cent in the current year - looks as optimistic as its prediction of 3.5 per cent growth in consumer expenditue.

The mean error in forecasting GDP a year ahead is at least 1 per cent. Growth could surprise on the upside - but at this stage it looks more likely to disappoint on the downside. Expect more cuts in base rates to warm up a rapidly chilling economy and the holy grail of a balanced budget to be postponed yet again, this time into the next millennium.

BT's rebellion is fraught with risks

When enough is enough, the grand gesture - rebellion and the barricades - is always a tempting one. The trouble with such an approach, however, is that once the forces of revolution are unleashed, the outcome is never predictable; often it is to the disadvantage of the original protagonists. The risk to British Telecom in deciding to take on the regulator is precisely this.

To come out fighting may give the management an initial flush of euphoria and satisfaction after all these years of regulatory oppression, but is it really the right approach from the shareholders' point of view?

By deciding to test the regulator's demands before the Monopolies and Mergers Commission (the reference has not been made yet but it is only a matter of time), BT is plainly betting that the awful precedent of British Gas will not be repeated.

In that case the grand old man of monopolies took on the regulator before the MMC and ended up with an even worse deal than the one it chose to fight. It was the beginning of the end for British Gas. British Telecom too seems to want to take on the regulator on all fronts.

Though its case may be a more powerful one than that of British Gas, this is a high-risk strategy. Breaking up British Telecom is an option which has always had plenty of intellectual support.

Geest chief avoids a slip-up

You have to hand it to David Sugden, chief executive of Geest. After skidding on every banana skin in sight over the past four years, he has kept his poise when it really mattered. Setting up a Dutch auction for his company's core plantation and import business ensured a better than expected price and, while shareholders' backs were turned, he has slipped out the back door with a pounds 420,000 pay-off.

Not a bad deal for overseeing a slump in Geest's share price from a high of 479p only two years ago, to just 153p before yesterday's deal effectively unveiled a big For Sale sign over the rump convenience food business. They closed 39p higher at 192p as the market tried to decide which of Unigate, Northern Foods or Hillsdown would pounce first on Geest's small but profitable food operation and its pounds 60m cash pile. Mr Sugden may not have had much luck growing bananas, but he plainly plays a cool hand of corporate poker. Noboa, the Ecuadorean group behind the Bonita brand, was used to handsome effect in boosting the price well above the pounds 75m touted in the papers even a few weeks ago. At pounds 92m for the core business (excluding the pounds 55m Fyffes is paying for two chartered ships), shareholders will probably feel he has belatedly earned his golden handshake.

So yes, Geest really will have no bananas, bringing to a close a 40 year trading link with the Windward Islands, a curious Commonwealth anachronism that outlasted all Britain's other agricultural links with its former colonies. The good news is that bananas will continue to cost next to nothing in the supermarkets - over-supply from the more efficient suppliers in the dollar-bloc of Latin America will ensure that Fyffes will have to squeeze all the available economies of scale to make a decent return on its investment.

The price paid of only seven times earnings in a "normal" year, looks attractive only on the assumption that a disease-free, hurricane-free year is any more likely than the Black Siratoka-blighted, tropical storm- swept seasons that have dogged Geest since it took the rash decision to move back up the production chain from its shipping roots into production. Fyffes' unchanged share price yesterday confirmed which company the market believes has struck the better deal.