Jeremy Warner's Outlook: Is Britain heading for economic inferno? The time to worry is not now, but two years out

Commission squares up to Sky - again!
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The Independent Online

As the election campaign raged, the economic news grew ever more alarming, culminating this week in a series of surveys showing that from retailing to housebuilding, manufacturing and services, things are cooling fast.

As the election campaign raged, the economic news grew ever more alarming, culminating this week in a series of surveys showing that from retailing to housebuilding, manufacturing and services, things are cooling fast.

There was more bad news yesterday in figures showing that personal bankruptcies are at a record high. This may have more to do with liberalisation of the bankruptcy laws, making it easier and less painful for people to declare themselves insolvent, than any tightening of credit conditions, yet whatever the reason, it hardly makes for reassuring reading.

More worrying from the Chancellor's point of view, it is now clear beyond doubt that the housing market has stalled badly. According to the latest survey from Halifax, published yesterday, house prices didn't rise at all last month, traditionally one of the busiest months of the year for the housing market.

Much use was made by the Bank of England last year of research which suggested that consumption is less determined by the ups and downs of the housing market than it used to be. Recent data seems to disprove the theory. For the past year, slowing retail sales have been an exact mirror image of the slowing housing market.

The Government, it seems, timed the election to perfection. If Mr Blair had waited even another six months, Labour's claim to outstandingly successful management of the economy might have looked a good deal less convincing. For more than five years now, the main story behind Britain's relatively healthy rate of economic growth has been high levels of consumption sustained by easy credit and strongly rising house prices. If this period of let-rip household spending is drawing to a close, economic prospects look correspondingly poorer.

These are the arguments that members of the Bank of England's Monetary Policy Committee must weigh this weekend as they take time out from their monthly meeting to decide what to do with interest rates. Up until a few weeks back, the working assumption in the City was that as soon as the election was out of the way, they would raise rates by a further quarter point.

The economic news since then has been so grim that this now looks rather unlikely. Yet all the indications are that inflationary pressures are still building. Despite the evidence of a slowdown and some recent well-publicised job losses, the labour market is still incredibly tight while growth in average earnings is a little above the level which has historically triggered inflation. The actual inflation rate has also been creeping up. In March, the consumer price index jumped from 1.6 per cent to 1.9 per cent, only slightly below the mid point of the Bank of England's target range.

As every schoolboy knows, slower growth ought to mean lower future inflation, so if the economy really is easing back, the MPC should soon once more be in a position to cut rates. Regrettably, it may not be so easy. One reason for rising inflation is higher oil prices, which is not something the MPC can control through domestic demand management. Rapid industrialisation in Asia in combination with a relatively strong pound has been helpful in keeping inflation low. We may largely have had the best of both these effects. Import prices are already rising again.

Even so, I can't hold with the view that the economy is about to fall off a cliff. In economics, it is always possible plausibly to argue the nightmare scenario, and pretty compelling it often is too. A particularly eloquent example of the genre was published this week by the investment bank ABN Amro, which postulates a slippery slope of reduced household spending and greater saving in anticipation of hard times to come, leading to widescale lay-offs in the retail sector, leading in what Keynes called the reverse multiplier effect to even lower household spending, and so on.

Yet there is one important reason for believing this is not what's about to happen, at least in the short run. It's called government spending. As things stand, the Chancellor needs growth to accelerate strongly from here on in if he's to meet his forecast of 3 to 3.5 per cent growth this year. But even if growth were only to be maintained at a trend of 2.5 to 2.75 per cent, it wouldn't be viewed as too bad a performance given the paralysis that grips Europe. There's every reason to believe this might be possible.

The Government's forecast already assumes a considerable fall off in consumption growth this year. As consumption falls away, the forecasters expect investment to take up the baton instead. The working assumption here is that overall investment will rise 6 per cent.

The Government cannot force business to invest, but it is very much in control of its own purse strings, and here the Treasury is planning for an astonishing 23 per cent increase in public sector investment spending. Since investment spending doesn't fall within the parameters of the golden rule, the Chancellor could theoretically spend even more without breaching his own, self-imposed financial disciplines.

It is almost certain that he will. Investment programmes will be brought forward and new ones invented. Government spending will take over where the consumer leaves off. New hospitals, new roads, new structures, new follies, new white elephants - so long as it can be categorised as investment rather than current spending, the sky's the limit.

If this is indeed to be the strategy, then we may have at least another two to three years of decent growth left before the music stops. The Chancellor's hope must be that something turns up in the meantime to keep it going thereafter.

It's silly to make predictions so far into the future, but the next election promises to be much more interesting than either of the last two. If the economy is by then in trouble, then the contest is going to be a more equal one. The Tories failed to make the headway they wanted this week because they had allowed themselves to become too much like Labour and therefore represented insufficient of an electoral alternative to the incumbents. Instead, the anti-war, protest vote went the the Lib Dems, who however ridiculous their policies, were at least different.

Do Britons really want the higher spending and taxes that the Lib Dems stand for, and the yet closer links to Europe? In their eagerness to give Mr Blair the proverbial bloody nose, that's what an awful lot of them voted for on Thursday, whether consciously or not. Emboldened by a weaker economy, the Tories might begin to offer the radical tax-reforming agenda that would again make them a viable alternative to Labour.

The economy is bound to seem more subdued for the next few years. Yet buoyed by public works, it is unlikely to degenerate into the "inferno" anticipated by ABN Amro. That comes later, when the money runs out, and to the horror of the Governor of the Bank of England, whose ambition it is to make monetary policy boring, both politics and economics might actually become interesting again.

Commission squares up to Sky - again!

BSkyB built its current success on securing exclusive TV rights to Premiership football games, and ever since regulators have been trying to figure out how to prize them away. Last time they were up for grabs, Sky's then chief executive, Tony Ball, hilariously outmanoeuvred the European Commission to again end up with exclusive access. Still smarting from the experience, the Commission is already working on ways in which it might deprive Sky of exclusivity when the rights come up for renewal the year after next.

This is a pointless and hopeless endeavour. Sports rights have never conformed to the usual rules of open competition and never will. The League sells exclusively to Sky for the simple reason that this is how it gets the best price. Without exclusivity, neither Sky or anyone else would pay the huge sum of money these rights are able to command, and the game would be correspondingly poorer. Is that what the fans want? It seems unlikely.