Outlook: Message to Monetary Policy Committee: stop worrying

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The Independent Online

Britain's topsy turvy economy becomes more perplexing by the day. On Thursday, we had another set of buoyant retail sales figures. Non-food sales in April rose by an annualised rate of an astonishing 9.5 per cent. To find anything remotely comparable, you have to go back to the Lawson boom of the late 1980s. Yesterday we saw the flip side of the coin. For the second quarter in succession, the economy is at a complete standstill. Britain is but a hair's breadth away from the official, two successive quarters of declining growth, definition of recession.

It seems like only yesterday that the Chancellor was boasting of the best economic performance in the G7. Come to think of it, yesterday would be about right for in his Budget speech last month, Gordon Brown took some pride in pointing out that while the rest of the G7 grew by just 1 per cent on average last year, Britain achieved 2.2 per cent. "In the past when there was a downturn, it was Britain that usually entered weaker and suffered longer.... But this time from a platform of low inflation and fiscal discipline, both delivered through the new monetary and fiscal framework, we have been able to steer a steady course of stability and growth".

No one is yet saying the Chancellor is wholly wrong in his analysis, but the figures are certainly showing a substantially changed position. From fastest growing G7 economy, Britain is almost certain to fall to the bottom of the league table this year. Even sclerotic old France grew by 0.4 per cent in the first quarter, and Japan, the sick man of the world economy, by even more. Perhaps more important, the first quarter's lack of growth means that there is now virtually no chance of the Chancellor meeting his growth forecast of 2 to 2.5 per cent this year. Who knows what might happen thereafter, but the Chancellor's prediction of 3 to 3.5 per cent the year after begins to look overly ambitious too.

With manufacturing still in the doldrums, and even once buoyant service sectors showing signs of weakness, the UK economy is being kept from recession by a combination of buoyant retail sales and the housing market. Low unemployment and cheap money is keeping consumer confidence high. For how much longer can that continue? No one really knows, for the present business downturn is different from recent precedents. In a normal business cycle, demand rises to a point where it outstrips capacity, causing prices to rise and policy makers to jack up interest rates and restrict credit. The process then goes into reverse. Demand contracts, capacity is cut, unemployment rises and the boom turns to bust. Booms don't die of old age, or run out of steam; they are brought to an end by central bankers, desperately trying to stamp out inflation.

The present business downturn is the reverse image of the usual pattern. The bubble economy of the late 1990s saw an explosion of investment in the New Economy industries of information technology, resulting in a misallocation of capital and capacity overhang of extraordinary proportions. Those excesses have come home to roost in a recession that is the worst in living memory for the semi-conductor and telecommunications industries. The weakness of UK manufacturing has little to do with "the strong pound" and everything to do with the collapse in demand in these New Economy industries. For these businesses, the climb back out from the doldrums is going to take years.

The remarkable thing is how little effect this collapse has had on the wider economy. The lowest inflation and interest rates for a generation has given consumers the confidence to borrow and spend as never before, helping to sustain a period of prosperity which is without precedent in its longevity, in the modern age at least. The potential for a serious road crash is all too obvious. Rising demand combined with an extremely tight labour market must eventually spell higher prices, notwithstanding the productivity gains and viciously competitive business environment of the New Economy. Higher inflation means higher interest rates, which would bring the debt-fuelled spending boom to a shuddering halt.

That's the textbook guide to the future, anyway. Good times inevitably give way to bad. Nothing is forever in this world, but it may be that we are are all worrying too much. All golden ages of prosperity eventually come to an end, but looking around at the world economy today, it's hard to see what might cause such a cataclysm. The capitalist world has survived the technology bubble, it survived 11 September and it survived Enron. Indeed it seems to be emerging from these disasters not weakened but strengthened. The lessons have been learned and the system buttressed against repetitions.

Other threats loom, not least the rattling of nuclear warheads on the Indian sub-continent. The Middle East is still a disaster area and American intelligence reports that al-Qa'ida is planning yet greater atrocities have to be taken seriously. But you cannot live every minute of the day in fear of being knocked over by a bus. Interest rates will rise a bit, and so will unemployment, but things are essentially OK. The present set of economic circumstances are unusual, to say the least, but that doesn't mean disaster lies just around the corner.


Forget Augmentin and Paxil, Jean-Pierre Garnier, chief executive of GlaxoSmithKline (GSK), told a conference call of analysts yesterday. They are products of the past. The future lies with a pipeline of 11 new product launches over the next 18 months and a further 13 thereafter.

Well, we all know what he means, but unfortunately for him the City is not much in the mood for jam tomorrow stories these days. In these more austere times, it is the present which really matters, and for GSK it has just received a good kicking at the hands of the Federal District Court of Eastern Virginia, which has again ruled in favour of the generic attack on Augmentin's patent protections.

If the generic operators take full advantage of the ruling, and launch their own versions of Augmentin at the earliest opportunity in July, then assuming a Prozac-style wipe-out of the original, GSK's earnings growth this year will plummet from the forecast 15 per cent to 10 per cent. For next year the forecast of growth is reduced from the low-teens to high single digits. For a company of GSK's size, such reductions translate into big numbers. Augmentin may eventually be a product of the past, but for the time being it appears pretty damned important to the present.

Mr Garnier reckons the generics would be fools to launch before the outcome of the appeal is known, since a half of all US patent rulings are overturned on appeal and the generics would have to pay GSK its lost profits in compensation if GSK is successful. But no one is counting on it, hence the stomach churning 8.7 per cent drop in the share price yesterday. JP, as Mr Garnier is universally known, is going to find it hard enough to lose his second best selling product ahead of time, but at the back of his mind there will be a wider concern. The generics have become hyperactive in their legal attack on extended patent protection, and for governments and health authorities desperate to save money, they are pushing at an open door. The big drug companies can only pray that yesterday's ruling isn't a harbinger of more serious problems to come.