Jeremy Warner's Outlook: King sounds a bit more pessimistic but he's not with the high street doomsters yet

Madness of Europe's working time rules; Lastminute heads for the exit
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The Independent Online
While John Clare, chief executive of Dixons, was yesterday warning in apocalyptic terms that the high street may be heading for a worse downturn than the recession of the early 1990s, a much more sanguine message on the economy was emanating from the Bank of England where, launching the quarterly Inflation Report, Mervyn King, the Governor, said the outlook was for continuing steady growth with inflation remaining close to target.

While John Clare, chief executive of Dixons, was yesterday warning in apocalyptic terms that the high street may be heading for a worse downturn than the recession of the early 1990s, a much more sanguine message on the economy was emanating from the Bank of England where, launching the quarterly Inflation Report, Mervyn King, the Governor, said the outlook was for continuing steady growth with inflation remaining close to target.

It would, of course, be somewhat surprising if Mr King had said anything else, for central bankers are not meant to be given to alarmist talk. If he'd said the economy was heading for hell in a handcart, it would almost certainly have become a self-fulfiling prophecy. Instead, I'm told, it is the nuances of the Governor's remarks you have to look for. Those much more expert than me in reading these hidden meanings talked of a more pessimistic bias than has been seen in ages.

Yet while Mr King dwelt heavily on the downside risks to the economy and admitted that the speed and scope of the downturn in consumer spending had taken the Monetary Policy Committee by surprise, the message most of us would have taken away from the Governor's press conference was strikingly more upbeat than the one we've heard in recent weeks from hysterical retailers and some City pundits.

The Governor was dismissive almost to the point of contempt of the idea that Britain may be entering a period of "stagflation" where there is high inflation and no growth. No one who had lived through the 1970s would think of today's combination of trend growth and on-target inflation as anything akin to "stagflation", he said.

Mr King is the first to admit that the Bank may be wrong, but not even in the most unlikely scenario painted by the Inflation Report's fan charts of projected growth and inflation does Britain come remotely close to recession over the next two years. It would require a most unexpected set of circumstances for this to occur.

So if recession is so unlikely, how come everyone feels like we are about to enter one? In part this is a relative phenomenon. After such a prolonged period of relatively high growth, especially in the bit of the economy we most notice, consumption, any kind of a slowdown feels bad. It is also because the balance of growth is expected to shift away from consumption and towards investment. In Mr King's view, we might even see some pick-up in the contribution trade makes to growth, after nine years of decline.

All this is just as the doctor ordered, though it is obviously of little comfort to the high street, which on top of a pronounced slowdown in consumption has to cope with some big structural changes in shopping habits, including the growth of online spending. However, it is perfectly possible that the Bank may have braked too fast, thereby triggering a sharper slowdown than it would have liked.

The Governor admits that he is at a loss fully to explain the sharp falls in retail spending at Christmas and their subsequent failure to recover. There are any number of possible explanations from the slowing housing and domestic credit markets to our apparent rediscovery of the merits of thrift after years of saving little or nothing. The trouble with belt tightening is that once it gets a grip, it tends to become addictive. Less consumption equals fewer jobs equals even less consumption and so on.

In our own industry, the media, we are already feeling the chill winds of recession blowing from the high street, with a very marked downturn in some forms of consumer-led advertising. As the market contracts, you might expect advertisers to spend more so as to attract a bigger proportion of what sales there are. In practice the opposite effect occurs. As sales fall, companies slash cost to protect profits. Inevitably the marketing budget gets cut first, if only because it is the least costly thing to cut. Advertising spend is a key lead indicator of tougher times.

Yet despite these signs of trouble to come, the Bank's prognosis is still a relatively optimistic one. After a weak phase, consumption is expected to recover to at or a little bit below trend, if not to the buoyant levels enjoyed in recent years. No disrespect to Dixons' Mr Clare, but I know where I'm putting my money.

The real concern about the UK economy lies further out. One of the reasons the Bank can feel so confident about a recovery in investment spending is that the Government has partially underwritten it: general government investment spending is forecast to rise 23 per cent this year. For how much longer can the private sector keep supporting this kind of manufactured growth? And will not the markets eventually extract a price in terms of higher interest rates for the borrowing it requires?

Madness of Europe's working time rules

Asked by a French journalist yesterday what the secret of Britain's economic renaissance might be, Mr King attributed much of it to labour market reform and suggested that others in Europe might learn from our experience.

MEPs yesterday demonstrated that they had indeed spotted the advantages by voting to quash Britain's opt out, negotiated 12 years ago by John Major, from the European working time directive. This is the piece of legislation which dictates that no one other than key workers, the professions and management should be allowed to work more than 48 hours a week.

Rather than making themselves more like us, the European Parliament has determined to end our "competitive advantage" and make us more like them. They were joined in this endeavour by Labour MEPs, many of whom defied the British Government in going along with this completely bonkers piece of labour-market harmonisation. On what planet do these people live? Have they not heard of China and the Far East, where many work double those hours for a tiny fraction of the pay?

It is one thing to say people shouldn't be required to work more than 48 hours a week, but to say that they shouldn't be allowed to is an infringement of personal liberty, and is highly likely to be economically damaging. Few full-time employees routinely work more than 48 hours a week, but quite a lot do from time to time, and there is a growing trend to supplement income through part-time working on top of full-time employment. Perhaps strangely, many of us would much rather work than watch EastEnders.

There's a lot wrong with Britain's long hours work culture. Many Europeans are able to work shorter hours because they have higher levels of productivity. This is surely something we would opt to enjoy ourselves if we could. And of course it is quite wrong that employees are required to waive their rights to a 48-hour week virtually as a condition of employment, as happens in about 30 per cent of UK companies. But to interfere with the right to work at a time of such vicious global competition is just madness.

Fortunately, the European Parliament still has no powers and the move is quite likely to be vetoed in the council of ministers. None the less, it is enough to make those of us who still believe in the European project despair.

Lastminute heads for the exit

Oh goody. Lastminute.com has received a takeover approach and those of you who held on to their original £50 allotment of shares in the flotation five years ago are in for a windfall of, er, maybe £20. All things are relative, however, Having floated at 380p at the height of the dot.com boom, the shares eventually sank to as little as 17p. If he persuades Sabre of the US to pay north of 150p a share, it will be a heroic achievement for Brent Hoberman, the chief executive and co-founder. He's the last of the original British dot.coms, he survived, his business is in fine fettle and he's achieved not a bad price, even if it's nowhere near the madness of the original valuation. Heady days.

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