Jeremy Warner's Outlook: Another kitchen sinker for struggling Abbey

Tight labour market; Minimum wage
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The Independent Online

A new logo and a massive write-off. Now why does that seem so familiar? It is only 18 months since Abbey National last changed its logo and look, while the write-offs chalked up over the last three years of crisis at Abbey are so big and numerous, they fair make the head ache just thinking about them. Now Banco Santander, Abbey National's new owner, seems to have caught the Abbey habit too. A further £564m of restructuring costs were charged to the Abbey profit and loss account yesterday and, at a cost of £8.5m, Emilio Botin-Sanz de Sautola G Rios III, Santander's grandly named chairman, is to introduce the Santander flame alongside the Abbey name on the company's logo.

The last rebranding, complete with its image of an upside down bank branch with all the furniture and fittings stuck to the ceiling, was meant to turn "banking on its head". This is the sort of desperate nonsense that companies are prone to when they utterly lose the plot, but rarely is it possible to reinvent the wheel, in banking or in any other field of business, and actually Abbey's efforts seem only further to have damaged the franchise.

Pre-tax profits in the core retail chain were down 20 per cent while there has been a further slump in market share. Abbey's share of new mortgage lending is down year on year from 9.9 per cent to 3.1 per cent, reducing its overall share of the mortgage market from 10.7 per cent to 8.6 per cent. Mr Botin must begin to wonder what on earth he's bought.

In response, Santander is accelerating the cost-cutting programme and, undeterred by the slide in profits, it continues to express complete confidence that it can stabilise and eventually rebuild the brand. But at what cost? Santander's decision to consolidate its position in mature European markets by acquiring Abbey made some sort of sense in theory given its high exposure to the emerging markets of Latin America.

Yet while these territories continue to flourish and grow, Abbey's position as a sub-scale brand in an increasingly competitive banking market looks ever more challenging. Abbey's core market in mortgages seems in any case to be coming seriously off the boil, to judge by the 43 per cent fall in new mortgage approvals for January announced yesterday.

Part of Santander's success in Spain has been built on "kiosk banking", a proliferation of small bank branches each requiring little space and few staff. It is unclear that this would easily replicate itself in the UK market and there seem to be no immediate plans to introduce it here. But if not that, then what? With Halifax turning up the heat of price competition across a wide front of banking products, it's hard to see what Abbey can do without further trouncing its margins.

For the time being, the stock market's scepticism over the Abbey acquisition looks more than justified. Santander has bought more of a pig in a poke than a decent hedge against the volatility of its Latin American earnings. By the look of yesterday's numbers, Luqman Arnold, Abbey's former chief executive, played a blinder when he persuaded Santander to buy at such a price. As a former investment banker, he plainly knew what he was doing.

Tight labour market

Stephen Nickell is the Monetary Policy Committee's (MPC) labour market specialist. One of his main claims to fame as an economist is the so-called "non accelerating inflation rate of unemployment", or Nairu, which dictates that the tighter the labour market becomes, the more likely it is to end in inflation. If this sounds only like a statement of the bleeding obvious, you've got it in one. Most economics is just that.

Yet the fact that one of the world's leading experts on such matters is so relaxed about the present state of the UK labour market (see interview, page 55), is plainly worthy of more than passing interest. The tightness of the UK labour market is seen by most as one of the biggest inflationary threats to the economy, if not the biggest. Professor Nickell, by contrast, doesn't think we are yet at the point when labour shortages might trigger a general rise in inflationary pressures. How come?

One reason might be that the labour market, though tight, doesn't appear to be getting any tighter. Unemployment is stable, and growing at about the same rate as the population as a whole. Another reason may be immigration, which has a depressing effect on wages, and the greater participation of women and the elderly in the workforce, which likewise provides a relatively "cheap" source of new labour.

A third reason, and this is more contentious, might be that the economy is simply becoming more productive, which means that fewer workers are required for the same output of goods and services. In any case, Professor Nickell doesn't think the present uptick in the rate of wage inflation necessarily anything to worry about, not withstanding yesterday's benchmark-setting announcement of a 10 per cent rise over the next 18 months in the minimum wage.

Professor Nickell plants himself firmly on the doves' perch by thinking the labour market not yet a threat to the inflation target. His comments will create new doubt about the future course of interest rates. Just as everyone thought the MPC was becoming more hawkish, along comes Mr Nickell to suggest that maybe an extra interest rate rise won't be required after all, or not for that reason, anyway.

So much for the daily machinations of monetary policy. As Mervyn King, Governor of the Bank of England, said at his last press conference, the MPC cannot know the future; it can only react to circumstance and trends as it goes along. One long obvious fault line in the way monetary policy operates these days is that it targets only a quite narrow measure of inflation.

This conforms to hardly anyone's real rate of inflation, for it is only an average based on overall spending patterns. Nor does it take account of house price inflation. Indeed, as a measure of genuine domestic inflation it is almost wholly useless, for one of the reasons it is so low is the deflating cost of a great swathe of imported goods, thanks to the growing industrial capacity of China and India.

This in turn allows interest rates to be much lower be for the same rate of inflation. The excess liquidity, or demand, thus created helped feed first the stock market bubble and, after that imploded, the house price bubble. One of the reasons monetary policy is so hard to read right now is that this is genuinely uncharted waters. No one yet knows how the slowing housing market is going to affect inflation and demand. Nor is it yet certain what the effect of rapid industrialisation in China is going to be on Nairu. If you cannot know the future, there's no point in worrying about it. No wonder Professor Nickell is so relaxed.

Minimum wage

Even michael Howard, leader of the Opposition, was full square behind the increases announced yesterday for the minimum wage - there's an election coming, stupid - leaving only business organisations to argue, Scrooge-like, the other side. Nobody these days disputes the case for some sort of minimum wage. By forcing employers to pay a minimum, it helps get people off benefit and into jobs, for there is little point in working if you can get more by staying at home.

The argument rather is about where it should be set, and there is little doubt that by continually raising the minimum at well above the rate of general wage inflation, the Government is beginning to damage competitiveness, particularly among smaller firms where it can make the difference between profit and loss.

The better way to address the poverty trap would be to abolish taxation for the low paid altogether, or rather significantly to increase the tax-free allowance on income. This could be paid for by raising the basic rate of income tax at little if any net cost to middle income earners. Don't hold your breath.

jeremy.warner@independent.co.uk

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