Jeremy Warner's Outlook: Buying on the never-never, or how emerging markets help sustain our free-spending ways

Richard Harvey takes a late gap year; An energy stand-off seems in prospect
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The Independent Online

Mervyn King, the Governor the Bank of England, advises us never to read anything into the monthly trade figures, which, because of carousel fraud and other statistical anomalies, he regards as pretty much worthless as a reliable economic indicator.

With this warning ringing in my ears, here goes anyway. Yesterday's trade figures for November showed a widening deficit in goods traded with the rest of the world, while the gap with countries outside the European Union hit an all-time high. Sterling fell a bit yesterday, but against the dollar it remains incredibly strong, and even against the euro and other currencies it continues to look incredibly robust, given the widening size of the trade deficit.

How to explain this paradox? Fast-back 30 years or so, and a deficit of this magnitude would have prompted a fully fledged sterling crisis, dramatic increases in interest rates, and possibly even a recession. Today these apparently massive gaps between what we buy and what we sell causes barely a ripple in financial markets. The difference is only partly explained by the success of our service industries in export markets and by growing sources of foreign income.

The main explanation is that, for some reason, large numbers of foreigners still want to buy sterling assets. I say this flippantly, for a lot of this money used to go to the US. American foreign policy and homeland security has alienated large parts of the Middle East and the rest of the world. Rightly or wrongly, they no longer trust the US with their money. The petrodollars instead flow through London.

The flip side of the widening current-account deficits of the Anglo-Saxon world is the mounting surpluses of many emerging markets, in particular China, Russia and the Middle East. These are countries with a massive excess in savings, but apparently nowhere to invest them within their own domestic economies.

Britain and America have a ready supply of liquid assets available to buy - property, shares, companies and bonds. Every time another household name falls to foreign buyers, there is another outpouring of angst-ridden comment from the British press. But in fact we need to keep selling the family silver to feed our appetite for foreign goods.

The petrodollars of the Middle East and Russia are one thing. With China, it is the weight of personal savings which flood the capital markets of Europe and America. China's widening trade surplus with America is often blamed on an undervalued currency, but it is equally valid to argue that in fact China has to run a surplus because it has an excess of savings with nowhere to go.

As long as personal access to credit in China is restricted, this will remain the case. High growth but relatively low levels of consumption mean ever-rising savings. It's a funny old world where some of the poorest people are skimping to finance the consumption of some of the richest, but that's the way of it.

For Britain, the position looks equally odd. A strong sterling means that exports become more expensive and imports cheaper. The rebalancing of economic growth looked for by the Bank of England and the Treasury away from consumption and towards trade is delayed again. The stronger the pound, the lower interest rates need to be, which, in turn, encourages people to borrow to spend. Unlike China, there are worryingly few restrictions on credit here.

All of which makes you wonder to what degree our own economic policymakers remain in the driving seat. It is world capital flows which now seem to control our destiny, not the Bank of England.

Richard Harvey takes a late gap year

Richard Harvey, the chief executive of the insurance giant Aviva, is taking the gap year he never had. Counting his time at Norwich Union, he'll have done nearly 10 years at the wheel by the time he retires in July, which is more than enough for any FTSE 100 CEO. It's about time he did something more constructive with his life, so it's off to Africa to work at the sharp end of aid and charity endeavour. It'll be quite a change from the staid old business of selling life insurance, but he's just the sort of person these causes need. Rarely do they get the chance to tap into such a mix of integrity and business skills. Aviva's loss is the charity world's gain.

Even so, the question has to be asked. Aviva's share price has not exactly been a star performer these past 10 years, though it has picked up sharply over the past 12 months. Is Mr Harvey jumping, or has he been pushed? Whenever a CEO of such long standing retires prematurely (he's only 56) with nothing in particular to go and do, there's always a suspicion he's been locked in the library with the loaded revolver and bottle of whisky.

Yet on this occasion, I think it can genuinely be said that he is going of his own volition, not just because he wants to put something back, but also because he believes the time to be right. In that sense, the manner of his going is similar to that of James Crosby at HBOS. Time to move on and let someone else have a go.

The company he leaves looks to be in reasonably good shape. He's also managed largely to confound the sceptics on his two most recent acquisitions, the RAC and AmerUS. The botched attempt to buy Prudential left a bad taste in the mouth and exposed a number of strategic weaknesses in Aviva's position, but there's little point in being in business if you are not prepared to have a go, and there appears to have been no lasting damage from the experience. Life assurers are most of the time dull old businesses. It's only when there is a mis-selling scandal, or when they nearly go bust, as happened three or four years back, that they grab headlines.

Those looking for fireworks from the new man at the tiller, Andrew Moss, are likely to be disappointed. His appointment marks no great change in strategy, nor apparently is there any need for it. Aviva is now achieving good growth in sales, profits, margins and dividends. The challenge is in sustaining this progress, rather than altering direction. His appointment will no doubt put other noses out of joint, most notably Aviva's head of UK operations, Patrick Snowball. He must have believed when he heard Mr Harvey was leaving that his time had finally arrived.

Yet Mr Moss seems a worthy successor and the transition should prove smooth enough. Just a few years back, he was number two to Nicholas Prettejohn at Lloyd's of London. Today Mr Prettejohn is only a regional head at Prudential, and unless his chief executive, Mark Tucker, comes a cropper, is unlikely to go any higher. A reversal of fortunes indeed.

An energy stand-off seems in prospect

Neelie Kroes, the European Competition Commissioner, says she means business in announcing plans to break up the Continent's big, vertically integrated energy companies. Whether anyone is listening is another matter.

For Britain's already unbundled industry, the case for separation of pipeline and power transmission networks from the supply companies that own them seems unarguable. For many on the Continent, it looks far from proven, and with security of energy supply a growing issue for all nations, the counter-arguments for the status quo - of maintaining big, powerful companies capable of securing and investing in long-term sources of supply - remain compelling.

The evidence, I would suggest, is finely balanced. On both sides of the Channel, there have been concerns about the level of investment in supply and transmission. In this regard, both models seem to be wanting. The same might also be said about prices. Today's relatively high energy prices in Britain may be a direct result of failure to invest in supply. In any case, the energy giants of Europe are not yet running up the white flag. Many have robust political support for their stance. An interesting test of wills is in prospect.

j.warner@independent.co.uk

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