Outlook: With a little help from China, Corus lines up a rescue rights

Benign deficit; Final salary hope
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The Independent Online

Most of the big rescue rights issues that stem from the over expansion of the last boom have now been done, but there remains a once key British industry that has yet to receive its dollop of fresh equity - steel. That rights issue is now well beyond the planning stage, and might be announced as soon as today. Even underwritten and deeply discounted, it's going to be a tough one to sell to City investors.

Corus, as British Steel called itself after merging with its Dutch counterpart, Hoogovens, has been a disaster area ever since its Dutch supervisory board rejected management plans to sell the group's aluminium interests to Pechiney of France. This gave the lie to the idea that Corus was ever a truly merged company, as the Dutch, not unreasonably, took the view that to sell a valuable asset for the purpose of restructuring the loss-making British steel industry was just good money after bad.

Since then, Sir Brian Moffat, the chairman, has brought in a new chief executive, Philippe Varin, and refinanced his long-term debt, but there is still insufficient money to undertake the British carbon steel restructuring thought necessary to put the company on a viable footing. The rights issue, which has presumably been squared this time with the supervisory board, should do the trick.

About the only thing Mr Varin has going for him in launching a rights issue is the fact that, remarkably, the world price of steel has been soaring on the even more remarkable possibility of a capacity shortage developing by early next year. This in turn is caused by runaway Chinese demand for steel. No doubt the sponsors have done their homework and already know the rights can be sold. Yet, ever since it was privatised, British Steel has staggered from one cyclical crisis to the next. Investors will take some convincing that the latest upturn in demand is any more than history repeating itself.

Benign deficit

Does it matter that Britain's trade deficit with Europe was at its highest ever for goods in September? Factor in services, and there was a record trade deficit with the rest of the world as well. No one would pretend this is something to be proud or complacent about, but nor is it a phenomenon that causes economists and policymakers to lose any sleep. Long gone are the days when numbers of the magnitude announced yesterday would prompt a run on the pound. Sterling barely batted an eyelid in response.

Why not? The answer lies with the transformation Britain has achieved from a manufacturing economy to one which today is nearly all service based. Perhaps, unfortunately, most of these services are not internationally traded, despite the fact that they create value and employment domestically. So although, increasingly, we buy our goods from overseas, we are not able to match them with an equal and opposite quantity of exports.

For last year as a whole, the deficit in goods was a mighty £46bn, or nearly 5 per cent of gross domestic product. That number is more than halved by invisibles - direct foreign investment into Britain, income on overseas investments, tourism, and wholesale financial services. Furthermore, Britain is bound to be sucking in more imports from Europe than it can export back given that its growth rate is more than twice as high.

On a number of different levels, then, the figures are not as alarming as they first appear. None the less, to believe that trade deficits of the size now being run by Britain and the US can be sustained indefinitely turns traditional economics on its head. Is it really possible for economies to survive and prosper in the modern, globalised world without making things that outsiders want to buy?

According to Will Hutton, chief executive of the Work Foundation, points out that as British manufacturing has continued to decline, growth in employment is coming largely from four areas of the service industries. The biggest is micro-services, from hairdressing to gardening and pet-sitting, not forgetting "white van man", hurtling around the country with his home deliveries, feng shui expertise, or bundles of drain unblockers. This phenomenon has in turn been fed by the growth of high earning but time poor, dual income households. Next comes business services, and particularly information technology, which employs two in every 100.

Not far behind is retail financial services. Finally, there is the biggest growth industry of them all - the public sector. This may not be the most efficient way of providing public service, but it is what the country voted for. By chance more than design, growing public sector investment has also provided a powerful Keynesian antidote to the business downturn that has engulfed much of the private sector this past few years.

So to return to the question, is it possible indefinitely to sustain a trade deficit of the magnitude announced yesterday? Well yes. Possibly it is, but only if Britons can continue to find innovative ways of generating wealth in other departments. We may not be at the forefront of consumer electronics, but we are cutting edge on video and PC games software. Our health services still have a long way to go, but we discover some of the best selling pills on the planet. And boy do we know about how to do home hairdressing, facials and leg waxing.

Final salary hope

One swallow does not a summer make, yet the news that EDF Energy is launching a new final salary pension scheme open to all 11,000 of its staff in the UK is a welcome break from the seemingly endless flow of announcements on the closure of defined benefit pension arrangements. The new scheme supersedes four legacy retirement plans run in the UK by the French state-owned electricity company, but the promise is that not one loses a penny of benefit while for 3,000 employees not in the old schemes there is the chance to obtain final salary benefits.

Mercer Human Resource Consulting, which helped design the new scheme, reckons EDF's initiative could be a harbinger of things to come. The flow of news is still strongly against final salary schemes, but according to Mercer the tide may soon be turned. Happy workers make for successful companies. Those that don't have to worry about providing for their old age tend to be more loyal, content and committed.

Such thinking runs against the grain of received wisdom on labour management, which until quite recently was very much that final salary arrangements were a barrier to labour mobility and change. Yet many companies are being forced to change their tune. Employment promiscuity has become a major problem in nearly all industries, making it harder for companies to maintain unique knowledge and expertise.

This is not just wishy washy liberal thinking. The evidence is that companies that treat their workers as a scarce resource gain competitive advantage. Final salary pension arrangements of the new variety being introduced by EDF - simple but flexible - could become a key part of the quest for skilled and creative labour.

Greater longevity, in combination with the stock market meltdown of nearly four years, has made companies wary of the open ended, uncapped liability that a poorly managed final salary scheme might lay them open to. To limit these liabilities, companies have been closing their final salary schemes in droves.

The Government has scarcely helped. With the exception of the abolition of the tax credit on dividends - which was an undisguised smash and grab raid on pension fund assets - most of what ministers done done in the pensions arena has been well intentioned enough. Unfortunately, the effect has been to pile on the cost and the disincentive to save. The latest proposals for an industry-wide compensation scheme to support pensions in insolvent companies only further undermines the case that can be made to shareholders for providing such benefits. If the tide is indeed turning, it is no thanks to the Government.

jeremy.warner@independent.co.uk

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