Outlook: The test of the resilience of the global economic system

<preform>Legal & General; Dixons/Sir Stanley &Acirc; </preform>
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The Independent Online

A DAY that changed the world. Of that there is little doubt. When all is said and done, 11 September will have changed the world in ways that we do not yet even half imagine. Perhaps strangely, however, the US and wider international economy may not be among them.

A day that changed the world. Of that there is little doubt. When all is said and done, 11 September will have changed the world in ways that we do not yet even half imagine. Perhaps strangely, however, the US and wider international economy may not be among them.

The jury is still very much out, but one year on and the economic effect of 11 September seems to have been amazingly limited. OK, so it did cause a three to four week hiatus in US economic activity and it cruelly exposed the weaknesses of some key industries, most notably airlines and insurance.

But it didn't of itself cause the business downturn, which was already in full swing before the Twin Towers collapsed. Indeed, by prompting swift and decisive policy action, it may perversely have helped stop the world economy from slipping into a more prolonged and deeper recession than it had.

Nor was 11 September responsible for the apparent loss of international faith in free market capitalism so much in evidence at the Earth Summit in Johannesburg last week. That's always been there too. In any case, the excesses of the technology bubble, Enron and WorldCom have done far more to shake public trust in free markets than anything the terrorists could throw at them.

In terms of their long-term economic effect, the most that can be said for the atrocities of 11 September is that they exaggerated trends already under way. Perhaps more significantly, they demonstrated just how resilient our economies, markets and way of life can be even in the face of the most terrible of onslaughts, and how effective are our safety nets when they need to be slung across.

Remarkably, the two economies that have performed best out of the big five over the past year are the US and Britain. Growth of a little over 1 per cent may not be much to boast of, but it's better than Germany, Japan or even France and it does seem to make the point that 11 September is not the main driving force in this downturn.

Both the US and Britain responded to 11 September by making further sharp reductions in interest rates. By coincidence, public spending was also rising sharply in both territories while in the US there were pre-existing commitments to tax cuts. While consumption has either been flat or falling in other large economies, in Britain and the US it has continued to grow sharply, thanks in part to the policy response. In the long run, this is obviously unsustainable. Already heavily indebted consumers are only making themselves more so, encouraged by the availability of cheap and easy credit.

Again, it's hard to argue that 11 September was the cause of this phenomenon. At the most, events a year ago just accelerated it. Solutions are going to be as hard to find as international agreement on war against Iraq, but to the extent that there are big economic roadblocks ahead, we can at least rest assured that they are largely of our own making, not Osama bin Laden's.

Legal & General

David Prosser, chief executive of Legal & General, is the pin-up boy of the insurance sector. His business is growing like topsy, his margins are rising, his life fund enjoys a triple-A rating and, unlike others, he seemed to be capital rich enough to withstand the present pummelling in stock markets. So how come he needs a rights issue?

The cynical view of rights issues is that they are merely a way of persuading shareholders to fund their own dividend payments. Investors pay out the money only to have it all paid back to them as dividends. Once the pot is exhausted, there's another rights issue.

If L&G really does need extra capital to keep growing, the more honest way of doing it might have been, like Aviva, by cutting the dividend. Mr Prosser claims he couldn't have done it that way since to take full advantage of growth opportunities he needs the money up front, rather than having to wait for the accumulator effect of a cut in the dividend. He also makes the reasonable point that Aviva's dividend was proportionately higher, so its cut raised more money and inflicted less pain than it would have done at L&G.

But perhaps the most potent argument for a rights is that by getting in first, L&G steals a march on its more distressed competitors and may even end up spoiling the patch for them entirely. There's only so much the market is prepared to cough up for insurers, and if it is the strongest players that need the money least that get there first, then the pressure on more capital constrained competitors becomes even more intense than it already was. Mr Prosser is grinding home his advantage, as all good businessmen do. There's never been a better time, Mr Prosser figures, to grab market share.

Few deeply discounted rights issues are as well received as L&G's was. The shares ended up on the day, despite the dilution involved. Mr Prosser must have been wondering why on earth he went to the expense of underwriting it.

Dixons/Sir Stanley

There are many who would lay claim to the title of "Britain's greatest living retailer", but few deserve it more than Sir Stanley Kalms, who today steps down as chairman of Dixons after a reign spanning more than half a century. During that time, Sir Stanley has managed to create one of the most enduring formats on the British high street with a market position in electrical retailing more than double the size of its nearest rival.

It hasn't all been plain sailing. The foray into the US proved a disaster. The company was late to recognise the growth markets of mobile phones and computer games, allowing others to to steal a march. And even today Dixons rarely finds itself far from the "Rip Off Britain" headlines, with the company regularly accused of overcharging and sharp practice. In most respects, however, the achievement is hard to fault. In a market where rapid price deflation and product innovation have been hallmarks, Dixons has generally managed to remain at least one step ahead of the pack. Even the internet, which everyone once said would destroy the high street in its entirety, failed to blow Sir Stanley off course.

Drive, judgement and hard work, there are many things that make up entrepreneurial success, but Sir Stanley has also had more than his fair share of that other key ingredient – luck. Sir Stanley would be the first to admit that neither the concept nor the execution of Freeserve was his, but he backed it and that's what counts. No other company did as much to popularise internet usage in Britain as Dixons through Freeserve. Remarkably, Dixons also made money out of it, and at a time when other "Old Economy" companies were dropping out of the FTSE 100 like flies, Dixons was through Freeserve able to hold its own alongside the more fanciful creations of the technology bubble.

In recent years, Sir Stanley has wisely taken a backseat to his more than capable chief executive, John Clare. But there's never been any doubt about who's boss. When The Independent dared to suggest Sir Stanley had held out for too high a price for Freeserve, wrongly as it turned out, he cancelled all his advertising until we apologised. It's hard to believe Sir Stanley is going. Like a prized antique, he's part of the furniture of British retailing. Few will dissent in wishing him a long and happy retirement.

jeremy.warner@independent.co.uk

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