Michael Harrison's Outlook: Bank grapples with an interest rate dilemma, but please don't mention the 's' word

Time to end Airbus subsidies; Driving on the left into Europe
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The Independent Online

Inflation is rising and growth is slowing. The increase in prices is largely due to the rising cost of oil but worryingly core inflation is also on the increase. The economy meanwhile is expanding at its slowest rate in 12 years, forcing even Gordon Brown to abandon his growth forecast for this year. Growth will be lucky to reach 2 per cent this year, after yesterday's industrial output figures which show manufacturing in technical recessions.

In the bad old days, this unpleasant confluence of rising inflation and slowing growth used to be known as stagflation. Threadneedle Street discourages mention of the 's' word but it nevertheless gives the MPC a big problem to grapple with next month. Does it continue to target inflation two years out and keep rates, at the very least, on hold with a bias towards raising them in the new year? Or does it react to the dramatic decline in consumer confidence and the slowdown in manufacturing and cut them?

The City is divided between those who believe rates will start to rise again quite soon and those, such as Lehman's, who foresee a sustained series of reductions taking rates down to 3.25 per cent by November, next year. Perhaps doing nowt will stay in vogue a little longer.

Time to end Airbus subsidies

It's no longer a paper plane but we still don't know whether the Airbus A350 will require a large amount of the folding stuff from Europe's taxpayers in order to get off the ground. EADS and BAE Systems, the two shareholders in Airbus, yesterday gave the formal production go-ahead for the aircraft but generously offered to forgo any of the £1bn in repayable launch aid (please don't call it subsidy) offered by the UK, French, German and Spanish governments, provided the US agrees to end the various back-door tax breaks and support from foreign governments enjoyed by Boeing.

The offer was supposed to run for a year but in the event it did not even last the day after the US rejected the olive branch out of hand, saying subsidy was subsidy, whether it was delayed or not. The US trade representative, Rob Portman, says he would prefer to take his chances with the World Trade Organisation and, at this rate, his wish is likely to come true.

In the event of a WTO hearing, both the US and Europe would probably be judged to be acting illegally in supporting their respective aerospace industries, triggering punitive sanctions from both sides. A trade war which prevented Boeing selling aircraft to European carriers and Airbus selling to the Americans would hurt Seattle more in the short-term as most of the US airline industry is in bankruptcy protection and therefore hard-pressed to order paper clips let alone jets costing $150m (£84m) apiece.

But there is no guarantee that it would stop there and since the US is still the world's biggest single airline market, the damage to Airbus could ultimately be immense.

Noel Forgeard, the cheeky French chappy who runs EADS, has rubbed Boeing's nose in it by openly admitting that while Airbus could afford to build the A350 without any state support, it will continue to ask for subsidy as long as it is available.

But he, and the Americans, know that the 1992 agreement which allows the taxpayers of Britain, France, German and Spain to cover one-third of the costs of new Airbus aircraft is long since past its sell-by date.

The agreement was drawn up in an era when Airbus still needed support to stand on its own two feet. It was in the interests of airlines worldwide therefore to ensure that a viable competitor to Boeing's monopoly was not allowed to fail.

But Airbus grew up a long time ago. It is profitable and it now commands more of the world market than Boeing, whether judged by orders or actual deliveries. If Airbus is so certain that the A350 will fly, then it should be able to fund the aircraft from the commercial markets without the crutch of state support.

Driving on the left into Europe

Hôla, what's all this? Unless something happens to put a spoke in his wheels, the boss of National Express, Phil White, is about to buy Spain's biggest coach operator. The rumoured price-tag of £250m gives the privately owned Alsa group a valuation twice that on which National Express trades so all the talk yesterday of what a great fit the two businesses will be had better prove correct.

Mr White can afford it because National Express, like the rest of the stock market's transport sector, is throwing off indecent amounts of cash but finding it harder to identify things to spend it on, at least in the UK.

With one bound, the Alsa deal gives Mr White the kind of continental presence that Arriva's Bob Davies has been striving for seven years to achieve. The difference is that all of National Express's eggs will be in one Spanish omelette whereas Arriva has spread its risk around several, mainly north European markets. And while Mr White has opted for the attractions of southern Europe, the expansion plans of Mr Davies are likely to take him further eastwards rather than south.

Both companies are, however, being driven into Europe by the same set of influences. UK rail franchises are no longer the licences to print money that they once were. The revenues may be enormous but the margins are tiny. As for bus and coach, the UK market is a mature one with modest growth and regulatory obstacles to expansion for the big operators such as National Express.

Much of the Continent, by contrast, is where the UK was a decade ago and is still only starting out on its journey to de-regulate public transport. For now the pickings are rich, as demonstrated by Arriva, which come next year will be bigger on the other side of the Channel than it is here.

Unlike America, which very nearly proved the nemesis of Stagecoach's Brian Souter, Europe has been a friendlier place to invest for UK transport companies. Mr White said at the beginning of the year he had at least £350m in his war chest to spend on acquisitions. If he is to develop a critical mass in Europe then the Alsa deal will not be his last. Watch this space or mire este espacio as the Spanish would say.

m.harrison@independent.co.uk

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