COMMENT: Ken and Eddie play second fiddle to Greenspan
"The market is divided over whether rates will be held or cut by, say, 25 basis points. But even if rates are left unchanged, this will generally be seen as simply a delay until August"
Thursday 06 July 1995
Two weeks ago, the Federal Reserve's chairman, Alan Greenspan, tantalised financial markets with a broad hint that he would back an easing of policy. For the Fed, it was "a time for intensifying our normal surveillance and analysis of ongoing developments to guage whether policy still is appropriately positioned to foster sustained economic expansion". Given that Mr Greenspan also suggested there was "some increased risk of a modest near-term recession", this could be interpreted as support for a cut in rates at the Fed's meeting this week. However, Mr Greenspan was also careful to point out that this early slowdown in economic activity "markedly reduced" the prospects for a more severe downturn later.
Since Mr Greenspan's remarks to the Economic Club of New York, indicators have sent mixed signals to Fed officials and Fedwatchers alike. On the one hand, this week's reading of the manufacturing economy in June from the National Association of Purchasing Managers came in at a level indicating recession. On the other hand, May's 20 per cent increase in new home sales suggested that the drop in long-term rates since the beginning of the year might already be reviving the economy.
The new homes sales figure was seen as particularly important because, the day after Mr Greenspan's speech, the Fed drew attention to the weakness of parts of the economy particularly affected by interest rates. According to its summary of regional conditions across the country, prepared ahead of each FOMC meeting, "activity in interest-sensitive sectors generally remains well below year-earlier levels and continues to decline in some areas".
Mr Greenspan predicted that the Fed meeting would be "most engaging". With this new data to absorb, this is one economic forecast that is bang on target. The market is divided over whether rates will be held or cut by, say, 25 basis points. But even if rates are left unchanged, this will generally be seen as simply a delay until August.
With cuts in rates also now expected in Germany, the international backdrop for future battles between the Chancellor and the Governor of the Bank of England, will be a more favourable one than Kenneth Clarke might have dared hope when he defied the advice of the Governor, Eddie George, to raise rates two months ago. But in the aftermath of the leadership election, there's a fly in the ointment. If Mr Clarke pushes his luck too far with a lurch towards fiscal as well as monetary laxness, he runs the risk of a crisis of confidence in financial markets.
Mr George left the Commons Treasury and civil service select committee in no doubt yesterday that, as far as he is concerned, the inflation target is still 2.5 per cent or less, regardless of the interpretation put by others on the Chancellor's recent Delphic utterances. In order to achieve it, he is urging an immediate further tightening of policy. With substantial tax cuts now a virtual certainty in November's Budget, prudent or otherwise, the Chancellor and Governor look set on collision course.
Heseltine's exit won't reduce DTI's power
Michael Heseltine gave the Department of Trade and Industry a reason to exist, after more than a decade of aimless drift under a succession of Thatcherite ministers who took little interest in industry. The message yesterday from Ian Lang, the new President of the Board of Trade, was that he would maintain the Heseltine tradition, as well as the archaic title that his predecessor revived.
While this vague statement could be no more than a ritual genuflection towards his predecessor's work before tearing it up and starting again, the signs are otherwise. Mr Lang has in fact had experience of being an industry minister in the Scottish Office, where he has been - in one job or another - for nine years, making him the longest-serving politicians that department has had.
Fighting for investment in Scotland was part of the job at the Scottish Office. More recently, he has campaigned successfully to have the nuclear industry headquarters located in Scotland as a quid pro quo for merging Scottish Nuclear with Nuclear Electric. So it is a reasonable bet that Mr Lang arrives at the DTI's Victoria Street offices in London with at least some of Mr Heseltine's interventionist instincts, even if his background as an insurance broker is short on direct experience of trade and industry. If that is what Mr Lang is really signalling with his assurance of continuity, it will have important implications for industry and for competition policy.
Mr Heseltine has unashamedly shifted the DTI's stance towards favouring the growth of internationally competitive British companies even though this has meant overriding the strict competition criteria that governed his predecessors' decisions.
Scottish & Newcastle's acquisition of Courage looked set to escape a monopolies inquiry under Mr Heseltine, despite giving the company a market share of a quarter or more. This keenly awaited decision - to be made now by Mr Lang, a Scot to boot, and well connected in Edinburgh and Glasgow - will be a key test of whether there is to be real continuity of policy. So will his decision on the new director-general of Fair Trading, a job for which Mr Heseltine had lined up John Bridgeman, a businessman from British Alcan. A decision was imminent before the reshuffle.
Another fallout from the changes is that the Government's decision on a pounds 2bn attack helicopter is bound to be delayed until the early autumn, now there are new Cabinet ministers at both defence and the DTI who will want to do their homework first. The GEC bid, which started late and seemed a poor third in the running, will benefit from more time to make the company's case in Whitehall. More significantly for GEC, if the interventionist Heseltine tradition continues under Mr Lang, as seems likely given the former president's powerful new position as Deputy Prime Minister, it could smooth the path to that long-awaited and much discussed bid for British Aerospace.
The instant Labour reaction to changes that include subsuming Employment into other departments was to criticise the Government for not caring about jobs. In fact, merging most of the Employment empire with the Education Department shows that the Government is thinking quite radically and constructively about how jobs are created in a post-industrial economy.
The changes also begin to address a much wider issue - the Treasury's unchallenged influence over the economy. In most other countries functions are split between a ministry of finance with another department given authority over economic affairs. In Britain, the Wilson government's disastrous Department of Economic Affairs has made it impossible overtly to try the experiment again. With the Department of Trade and Industry taking over most of the rest of the Employment Department's functions, however, it should none the less become a more powerful counterweight to the Treasury.
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