Jeremy Warner's Outlook: Uptick in investment does not mean business has stopped predicting turbulence ahead
Bowker takes wheel at National Express; Reed avoids the internet blues; Final shots in the BAA bid battle
Thursday 25 May 2006
Good news. The UK economy is rebalancing, with more investment and less consumption, just as the Chancellor and the Bank of England said it would. That, at least, was the spin that was being given yesterday to Office for National Statistics figures showing that business investment rose by 1.7 per cent in the first three months of the year compared with the final quarter of last year, and 2.8 per cent year on year.
To me, this seems a somewhat slender difference to hang the rebalancing argument on, particularly as it follows a near 1 per cent fall in business investment in the final quarter of last year.
The amounts involved are also too small to make any more than a marginal difference to overall growth. Investment in manufacturing rose 7 per cent to £3.8bn compared with the final quarter of last year, but investment in the much larger service sector actually fell a bit to £20.7bn. True enough, the numbers do finally seem to be moving in the right direction, fuelling hopes that growth will become less dependent on consumption, but not yet by much.
The failure of business to invest at a time of sustained growth in the world economy and exceptionally low interest rates has long puzzled members of the Bank of England's Monetary Policy Committee.
The CBI and others have pointed to the growing burden of tax and regulation on business. What's more, the debt-fuelled over investment of the late 1990s may still have to be fully worked out of the system. Memories of the bubble remain relatively fresh. Yet though these are certainly factors, the bigger reason, I suspect, is a psychological one. Many business leaders simply don't believe the present growth phase will last.
We've already seen these doubts surface in the wild gyrations of equity and commodity prices of the last two weeks. In the markets, there is now open talk of a recession to come as interest rates are raised to choke off inflationary pressures.
I wouldn't altogether discount these prophets of doom. They certainly have the upper hand with investors right now, and there is, in any case, little doubt that the pace of growth in the world economy is set to slow quite sharply. If things carry on as they are, there is little chance of that rise in business investment persisting into the second and third quarters. Many businesses will already be preparing to batten down the hatches.
Yet the balance of probability still has to be that this is more of a temporary setback, of the type which is fairly typical for this stage of the cycle, than the start of a prolonged downturn. All economic cycles experience a mid-term financial crisis as policy is tightened to mop up the excess of liquidity released when growth was subdued. But the pattern is that things then come back again.
Can Britain survive this bout of turbulence relatively unharmed? Gordon Brown, the Chancellor, had better hope so, for his public spending plans are dependent on it.
Bowker takes wheel at National Express
From poacher to gamekeeper and back again. It's hard to keep a straight face over Richard Bowker's appointment as the next chief executive of National Express. While few would quarrel with his qualifications for the job - he used to run Virgin Trains before moving on to become head of the Strategic Rail Authority - he is regarded with suspicion both by the industry, whose nose he regularly put out of joint when at the SRA, and by the Government, which had so many issues with the way he ran the authority that it eventually abolished it altogether.
Still, probably better Mr Bowker than Christopher Garnet, beleaguered boss of GNER. He was also said to be in with a chance of filling Phil White's shoes at National Express, notwithstanding the mess he has got himself into with the East Coast mainline.
A railwayman through and through, he was so desperate to run his own train set that he hugely overpaid for the franchise and is now paying the price. Claims that the Government double crossed him on the terms are eminently believable but probably won't do him any good. As for Mr Bowker, he's famously both forthright in his views and quite sensitive to criticism, which in business can be an explosive combination.
In any event, he'll makes a worthy successor to Mr White. Still only 40 years of age, he'll certainly bring ideas and energy to the job. The journey promises to be an eventful one.
Reed avoids the internet blues
Few would disagree with the proposition that the internet is nothing but bad news for traditional media - in particular print and broadcast TV. Today's young adults expect to get their reading matter for free, never mind how else it is paid for, and in growing numbers, they shun the TV schedulers to create their own channels out of material downloaded from all over the world. Some of them barely recognise the once all-powerful brands those of a certain age grew up with - the BBC, ITV and so on. Winning this audience back may be impossible given the infinite variety of choice offered by broadband internet.
Yet there are some "old media" brands which have not only continued to thrive in the internet age, but have actually been enhanced by it. One of them is Reed Elsevier, the FTSE 100's biggest publisher. It was once thought that Reed too would be undermined by the "open source" method of distribution that the internet makes possible for the scientific, business and legal material Reed specialises in publishing. In fact, it has had no significant impact at all.
By robustly defending copyright from the start, in sharp contrast to many other traditional media companies, Reed has kept a tight grip on its subscription revenues, which the internet has actually enhanced. Reed achieved near 10 per cent growth in overall revenues last year, and 15 per cent growth in digital income, which now accounts for 35 per cent of the total.
Unlike other media players, Reed has actually been able to charge more for its online offering than its printed material. Consumer media brands are being decimated by the internet. Just look what downloading has done to the music industry. There is a growing reluctance among consumers to pay for content. Yet in the business arena, the effect is the reverse.
Businesses may be prepared to pay more for the online version of the unique content Reed sells because it is capable of making them more efficient. For instance, legal research which in the past might have taken days or weeks to undertake can now be done in a matter of hours online because the depth and linkages of the online database makes everything readily accessible. Both in the scientific and legal professions, this phenomenon has already prompted very substantial productivity gains.
By making themselves Google-free zones, Reed and other publishers like them are turning the internet to their advantage. It's a model other, more consumer-based publishers might learn from, rather than waiting for death by a thousand cuts at the hands of the search engines.
Final shots in the BAA bid battle
The battle for BAA, the airports operator, is fast approaching its final denouement. In the past few days, Ferrovial has received clearance to proceed from the competition authorities in Europe, with the Office of Fair Trading in Britain apparently so unconcerned about the matter that it made no attempt to claim jurisdiction. Likewise, Ferrovial yesterday reached some kind of accommodation with the trustees of the BAA pension scheme.
There remains only the question of price, which as things stand is too low to succeed. One of the centre pieces of the BAA defence - a £750m capital return - is meanwhile out in the open. Mike Clasper, the BAA chief executive, had better hope Ferrovial isn't prepared to go much higher, for in my view, the size of the capital payment may be too small to see off a bid pitched at, say, £9 a share, particularly in such uncertain markets. On both sides, the brinkmanship is extreme.
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