Outlook: King a sea of calm, but outside the gales are blowing hard

Judging by his performance yesterday, Mervyn King is already in Governor of the Bank of England mode, even though he doesn't take up the post for another couple of months. His demeanour was one of self-confident and infectious calm as he gave his three monthly press conference on the Bank of England's latest Inflation Report.

Deflation? Not a problem in Britain because the Bank's symmetric inflation target meant it had a duty to prevent inflation falling too low as well as stop it going too high. The precipitous fall in the pound? A good thing really, because it would help the balance of trade, insulate Britain from any deflationary pressures elsewhere and because, in any case, the Bank thinks the inflationary impact won't be as marked as in the past.

So what about the Bank's disagreement with the Chancellor on growth? Conveniently, the fall in the pound has allowed the Bank to raise its longer-term growth forecast, which for next year is now less than half a percentage point lower than the number used by the Chancellor for the purposes of his Budget arithmetic. That's not such a big gap as to be meaningful, Mr King suggested. The Chancellor assumes stronger consumption growth than the Bank, and more progress on productivity, but otherwise they were pretty much in agreement.

OK, so what about the housing market? Surely Mervyn is still worried about that given the fuss he made about it six months ago? Well, no, not really. Actually the Bank has been pleasantly surprised by the speed with which house price inflation is abating. Everything is working out fine in the best of all possible worlds and there's really nothing to worry about.

Let's hope he's right. The news from outside Britain might suggest otherwise. In the eurozone, there was no growth at all in the first quarter, with Holland, Germany and Italy either already in recession or heading that way. The position doesn't look notably better in the US. Both retail spending and industrial production fell in April, and to the alarm of almost everyone, factory gate prices showed their greatest fall since records began. One month of poor data does not a deflationary winter make and, in any case the main factor in last month's price deflation was falling oil prices in the aftermath of the Iraqi war.

But many other prices were also falling, including automobiles, and it is easy to see why Alan Greenspan, chairman of the Federal Reserve, last week raised the deflationary bogey. After yesterday's clutch of numbers, the Fed will almost certainly be cutting interest rates at the next available opportunity. Mervyn King may or may not be right to be so sanguine. If only the rest of the world could afford to be the same.

Movie obstruction

Stelios Haji-Ioannou, founder of easyJet, launches his latest business venture next week, EasyCinema, in which he plans to apply the same demand management techniques so successfully used by easyJet to the stodgy old world of cinema going. Book early at off-peak times and you'll pay virtually nothing. Book late when everyone else wants to go as well and you'll pay a little bit more.

He's also planning to apply the same concept to takeaway pizzas, intercity bus travel, hotel accommodation and cruises. But for the time being it's his first cinema in Milton Keynes that's occupying all his time. Unfortunately, there's a snag. He won't be showing The Matrix Reloaded, or indeed any other newly released film. Instead he's going to have to make do with second run movies.

It hasn't been for want of trying. The distributors have been asked to name their price, but most of them won't have anything to do with him. Undeterred, Stelios still thinks a viable business can be built on the second run films that a few of the distributors are prepared to give him, but he readily admits it wouldn't be nearly as large as one with access to new releases. Why the obstruction?

Movie distribution in Britain is dominated by six players, collectively accounting for some 90 per cent of the market. All but one of them is owned by the major Hollywood studios. They don't like Stelios's idea, which they think will devalue their product by making it possible to view newly released films for so little money, and they are determined to snuff him out. This would not just be a shame; it would also amount to seriously anti-competitive behaviour. Lamentably, there seems to be nothing the Office of Fair Trading can do about it. Stelios could mount his own legal challenge but, given the costs of doing so, it would be high risk stuff.

That hasn't stopped the big distributors retaining just about every decent competition lawyer in town on the off chance that Stelios will give it a go.

To succeed, Stelios would either have to show that the distributors are colluding in depriving him of first run movies, or that they are in effect acting as one in a manner which amounts to deliberate retail price maintenance. The first is virtually unprovable even if it was going on, while collective dominance is extraordinarily difficult to make stick, especially when dealing with copyright. Were Stelios to succeed, it would undoubtedly transform the cinema business, in the same way as dynamic pricing is transforming short-haul airline travel.

As Stelios says, it makes little sense that you largely pay the same whatever movie you see, regardless of how much it cost to make, whatever day of the week or time of day you chose to see it. Few other leisure businesses operate in that manner. It's time that cinemas stopped doing it too. At the very least, the OFT needs to threaten the distributors with a new Competition Act investigation.

Safeway grounded

The damage being done to the Safeway brand by the protracted five-way battle for the supermarket chain was laid bare in all its gory detail yesterday. While the Safeway chairman David Webster sits and waits for the competition authorities to rule on the four trade bids or for Philip Green to get off the fence with a serious offer, the business is becalmed and drifting.

Nearly all the indicators are pointing the wrong way. Like-for-like sales and margins are both down, as are store openings and investment levels. About the only thing moving in an upward direction is the wages bill, which was inflated by £6m of loyalty bonuses last year to prevent staff from jumping ship.

There was one bit of good news in yesterday's figures in the shape of a small increase in like-for-like sales in the first six weeks of the current year. But that will soon disappear when comparisons are made with the June quarter last year, when jubilee street parties and World Cup drinking binges helped clear the shelves.

Small wonder that Tesco's Sir Terry Leahy chose to throw his hat in the ring alongside William Morrison, J Sainsbury and Wal-Mart's Asda, even though he knows he's got virtually no chance of being cleared unconditionally to bid. The market share he is picking up from Safeway must be making the resulting bid costs self-financing.

Having in effect put the company up for sale by agreeing to a merger with William Morrison, the nightmare scenario for Safeway now would be if all four trade buyers are blocked outright. Mr Webster and his chief executive Carlos Criado-Perez seem just about to be keeping the ship afloat, but it is a self-evident struggle. The company may already be fatally wounded, which could allow Mr Green to succeed with a low-ball bid if the trade buyers are blocked.

Even if the Competition Commission reports by the deadline of 12 August, the earliest a bid is likely to land is late September. In the meantime, the company is suffering slow death by a thousand cuts. For Mr Webster at least, it's going to be a long hot summer.

jeremy.warner@independent.co.uk

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