Comment: A virtual Treasury that Ken can live without

`Forecasters hardly ever beat the average of their peers for more than a year or two at a time, so finding an outsider who will do better is about as easy as picking the Grand National winner'

The "virtual corporation" seems to be all the rage these days so why not a virtual Treasury as well? Perhaps that is what the Chancellor had in mind when he announced yesterday that consultants would be appointed shortly to study whether its economic forecasting functions should be contracted out to the private sector.

It all sounds very laudable and efficiency oriented. If the BBC can outsource just about everything apart from programme commissioning and airlines can contract out simple administration jobs to India, why not let Whitehall follow the fad?

But hold on a minute: surely one of the core roles of the Treasury is to monitor and forecast economic events and take action where necessary to correct problems?

Furthermore, the forecasting function is not confined to churning out the Budget Red Book once a year. Economic models are also used routinely in the Treasury to look at the impact of new policies for tax and spending.

For a start, there would be a minor security problem, in that an outside firm would have to be told all the tax and spending options. More seriously, to split the forecasting function from the analysis of policy options, which would have to remain in the Treasury, is an unnecessary extra complication and expense.

Given the questionable advantages of going this route, the potential cost savings look modest. With only 45 people affected, including support staff, the total budget must only be a couple of million at most and the potential savings from contracting out must be considerably less.

The Treasury is no better and no worse at forecasting than other so-called experts. Experience also shows that forecasters hardly ever beat the average of their peers for more than a year or two at a time, so finding an outsider who will do better would be about as easy as picking the Grand National winner. It is hard to see the point of it all.

Little British in the British car industry

These days there are not many things about the British car industry that are still truly British, save perhaps for the spacious Belgravia headquarters of the Society of Motor Manufacturers and Traders.

Britain long since gave up the pretence that it actually owned a car industry. Much easier to leave that to the Americans, the Japanese, the French and, God forbid, the Germans. Next it will, no kidding, be the Koreans. Now it appears that car buyers no longer need to keep up the pretence that they prefer to have a British-built model in the driveway either.

From the welter of statistics spewed out from the SMMT's portals yesterday, two stick out. Last year, for the first time since Henry Ford plonked a car plant in the Essex marshes, the "British" car industry exported more of its output than it sold here. Second, and this follows logically, import penetration passed the 60 per cent mark for the first time.

Why bother making Metros, sorry Rover 100s, for the masses when Nicole is driving them crazy in her Renault Clio?

Does all this matter? The SMMT doesn't seem to think so. Indeed it was in a positively self-congratulatory mood yesterday. Car sales have broken back through the 2 million barrier for the first time since 1990 and output has not been higher since way back in 1973 when we still had an empire to flog the Oxford Morris to.

Who cares that six in 10 buyers here now prefer something more exotic? Look at Italy and France, where imports are also rising. Look at Ireland and the Netherlands, where the situation is even grimmer. (Neither sadly sports an indigenous car industry.)

In fact it almost certainly does matter. First, what profits are being made from the car industry are not accruing here. True, the sector may not as a whole be covering its cost of capital.

But when the good times roll, they will roll in the direction of Detroit, Tokyo, Paris, Munich and Seoul.

Second, where the profits (and the losses) roll is where the decisions are ultimately made. The Japanese are probably too far away and have too much capital invested to go cold on Britain - unless it goes cold on Europe. But it is a different story for the rest. Linwood discovered that a generation ago. Longbridge and Halewood may one day find out that nothing is forever.

No end to the Nikkei's woes

Most of those who think markets are going to fall this year have focused firmly on Wall Street. The case for this point of view is a strong and many-faceted one, but there is at least one aspect of it which is more than dubious. It is that the higher something goes, the further it will eventually fall. Not always, it seems. One thing is looking increasingly likely, however; Tokyo will have another bad year of it. A near-550 point fall in the Nikkei on Tuesday night gave a timely reminder of the endless sorrow of this once-buoyant market. Just as there is little sign of Wall Street's dizzying assent into the heavens coming to an end, it is hard to see why the pain of the Tokyo market should ease, either.

Until the summer, overseas investors kept the Nikkei index on a gently rising trend. They do this most years, the logic being much the same as that which sustains all those stale Wall Street bears. Eventually, inevitably, the Japanese market must revive, everyone says, and every year they seem to get it wrong. Those purchases have now dried up and it is hard to see why they would resume with the economy looking so lacklustre and the yen showing no sign of renewed strength domestic investors will be tempted overseas for the same reason, looking for higher yields and a hedge against the weak yen.

Liquidity flows alone, then, are likely to have a depressing effect on Japanese share prices. The fundamentals do not look very promising either.

One problem is the uncured debt hangover from the late 1980s. In its recent annual assessment of Japan the OECD said it was still impossible to estimate what the eventual cost of bailing out the banking system would be. The mountain of bad loans will remain a burden on government spending and on bank lending.

A second issue is the deregulation of the economy. Even the Japanese government has conceded that this is a necessity. Although the process ought to be beneficial in the long run, raising the profitability of the corporate sector above its past trend, it will bring short-term pain. The effect is to squeeze companies in the protected sectors, many of which are internationally uncompetitive, causing them to cut costs, transfer operations overseas where possible, and lay off workers.

Growth in the economy as a whole is going to struggle to reach 2 per cent this year. A recent tougher-than-expected budget has done nothing to bolster the position. Even at these depressed levels, present valuations put on many Japanese companies hardly look justified.

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