Outlook: The spectre of deflation continues to haunt the economy

SABMiller/Peroni; BCCI liquidation
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The Independent Online

There is something surreal about the economic news that emerges daily from the Office for National Statistics. The economy may have ground to a halt, but unemployment continues to fall, average earnings and retail spending are still rising at a fair old clip and so too are house prices. The statistics certainly don't point to an economy on the edge of recession.

Look beneath the surface, however, and the situation is a good deal more alarming. Unemployment continues to fall mainly because of job creation in the public sector. A relatively new feature exposed in yesterday's figures is the growth in part-time employment, which suggests the Government is achieving some success in weaning people off benefit through generous tax credits. Unfortunately, neither form of employment helps the tax base, and for the economy truly to be as sound as it seems requires a decent upturn in the private sector.

That's proving elusive, despite the end of the Iraqi war and the recent steep fall in the value of the pound, which ought to help industry though increased exports and import substitution. If, on the other hand, it also triggers inflation and leads to a rise in interest rates, no one's going to think the effect very welcome.

Meanwhile, outside Britain, the economic news looks far less benign. Retail spending figures from the US yesterday, showing that on the other side of the Atlantic there was no Baghdad bounce, were awful. Excluding automobilies, sales were down nearly 1 per cent in April. Coming so soon after Alan Greenspan's comments about falling prices becoming a greater threat to economic stability than rising prices, they have once more brought the gloomsters out in force. The D word – deflation – is again on everyone's lips.

Both the Federal Reserve and the the European Central Bank have now warned about the threat of deflation. Will Mervyn King, governor-elect of the Bank of England, add his voice to the chorus at today's press conference to discuss the latest Inflation Report? As an inflation hawk, it would require quite a change of heart for him to do so. Instead, he'll be pointing to the improvement in growth prospects prompted by the falling pound. Even so, the Bank will continue to fall a long way short of the Chancellor's fantasy forecasts of 3 to 3.5 per cent for next year and the year after. Restoring growth must take priority over the fight against inflation, and whatever the statistics show, that requires further cuts in interest rates. The situation is a lot more perilous than it seems.

As Japan has demonstrated, once deflation takes hold, it is virtually impossible to shake off. The anticipation of falling prices causes the population to lock up its capital and throw away the key. Spending for consumption and investment becomes frozen in time. The Federal Reserve seems already alert to the possibility. Let's hope the Bank of England is as well.


I'm a sucker for Italian brands and as a consequence I've always liked Peroni beer, indistinguishable though it is from all the other euro-fizz on the market. But I don't often drink it and hardly anyone else outside Italy does either, so I struggle to understand why SABMiller is once again dipping into the piggie bank for the privilege of acquiring it. SABMiller was a late entry into the auction for Peroni, with both Scottish & Newcastle and Interbrew widely thought the front runners. As a result, it has had to pay a full price to secure the prize.

As it happens, prize is probably the right word for it is hard to see any other reason for wanting to acquire the company other than as a trophy. SABMiller protests that there are benefits to be had by selling the brand through its international distribution network. Furthermore SABMiller will be able to use the Peroni network in Italy as a market for its existing brands. The reality is that beer doesn't travel well, both because it is expensive to transport and because it is even more expensive to support with adequate promotion once sold outside its home turf.

The synergies and cost benefits SABMiller will derive from this deal are tiny, and were it not for the fact that Graham Mackay, the phlegmatic South African who runs SABMiller, is essentially one of the good guys on the corporate landscape, it would be tempting to think he's only bought it for the purpose of further boosting his air miles with regular trips to Tuscany and Rome.

The scramble for international beer assets among the major players almost exactly mirrors the same process among the tobacco companies, but I cannot for the life of me understand the point of all this empire building. It seemed fair enough when Mr Mackay first attempted to diversify away from South Africa. For historic reasons, SAB has a virtual monopoly of the South African beer market, and there was nowhere else to go except overseas.

Mr Mackay chose his assets well, always buying market leading positions in fast growing developing markets, such as eastern Europe and Latin America. Indeed, he would make a virtue out of the fact that SAB, unlike many of its peers in international brewing, was an emerging markets company. Then he paid $5.5bn for Miller in the US, and in so doing Mr Mackay made SAB just like everyone else. We'll learn next week, when the company issues full year results, whether it's made any progress in reversing Miller's fortunes.

Mr Mackay is not alone in becoming a collector of brewing assets. S&N and Interbrew are ploughing the same furrow. The idea seems logical enough but I'm not convinced this is a strategy destined greatly to add to shareholder value.

BCCI liquidation

About 10 years ago I wrote a column for The Independent on Sunday in which I fulminated against Deloitte & Touche for the costs it had incurred in the BCCI liquidation. At one stage the accountants were employing so many people on the liquidation in Abu Dhabi alone that they were able to field not one but two local football teams. I think the costs were then running at about £60m, which I considered an iniquitous waste of money given that it didn't look as if creditors would get a penny of their money back.

Today few of us can even remember what the Bank of Corruption and Criminal Incompetence was let alone who the creditors were and how they were defrauded. None the less, the biggest liquidation in history has continued to keep the lawyers and accountants in gainful employment and there are still tens if not hundreds of actions going on in pursuit of the money. The total costs of the liquidation have meanwhile risen to a gob-smacking $1.2bn worldwide, and that's before legal action against the Bank of England even comes to court.

The liquidators justify such expenditure on the grounds that it works. Once there was little hope of any recovery at all. Today creditors have had 75p in the pound back, with the latest 15p installment announced yesterday. Vigilant pursuit of auditors, regulators, hidden deposits and shareholders has succeeded on an unprecedented scale. So I guess I'll just have to eat my words. High-cost liquidation is not the disreputable, graveyard profession I thought it was.

Still, nothing excuses the case Deloitte is bringing against the Bank of England. I'm told that this stands very little chance of success, if only because the liquidators must prove not just regulatory negligence, but that the Bank deliberately set out to help defraud BCCI depositors. That hardly seems possible, let alone likely. But even on the remote chance that the liquidators win, this is a completely unjustified case.

The Bank may be the holder of the nation's foreign currency and gold reserves, but its capital is tiny and it would be the taxpayer that would have to pick up the tab for any multibillion pound award of damages. What on earth has the British taxpayer got to do with the collapse of BCCI? You may well ask. The lawyers and accountants working on the BCCI liquidation have had a good run for their money. But it's time to call it a day.