Sir Michael plots new path through turbulence

Producer prices; Progress at WTO; Pension fund loss

As America and the world reels from another New York plane disaster, BMI British Midland's decision to re-invent itself looks grimly well-timed. If the cause of the Airbus crash is found to be terrorism, then the effect on the aviation industry can only be guessed at. But even if the tragedy was the result of a freak accident, then the already battered confidence of the airline passengers is bound to take a further knock.

That spells bad news for the full-service scheduled carriers but not necessarily for the low-cost operators such as easyJet and Ryanair, which have already bounced back from 11 September and are reporting traffic growth. BMI British Midland fits, uncomfortably, in between the two ends of the spectrum – neither a flag-carrier for all its transatlantic ambitions, nor a budget airline for all the low fares it offers in comparison with the likes of British Airways.

BMI has now decided to move closer to the low-cost model, while still retaining its full service status. Pilots will work more hours and planes will stay in the air for longer. The airline will fly to fewer destinations but more often and the fleet will eventually consist of a single aircraft type. The money saved will be used to offer cheaper fares.

At the same time there will still be a curtain half-way down the cabin separating business class from the plebs, an executive lounge to call into and a frequent flyer programme. BMI also retains its ambition to become the third UK carrier to the US from Heathrow. It will be fascinating to see whether the wily BMI chairman Sir Michael Bishop can pull off this hybrid concept of a low-cost, full-frills airline. The last time it was tried, with Debonair, it ended in disaster

Producer prices

Remember the "new paradigm"? This was the belief that rapid technological progress in combination with the forces of globalisation had succeeded in abolishing the business cycle. Similar theories are invariably propagated at the top of every boom, and equally invariably they turn out to be wrong. Well, today we do live in a new paradigm of sorts, only it's not the golden age of low inflation growth widely believed possible only a couple of years ago.

You'd have to have been on a different planet not to have noticed the headlines, or indeed witnessed and felt the consequences in your every day life. The lowest base rate in 38 years, the lowest mortgage rate in 46 years, and now the most pronounced fall in year on year producer prices since records began in 1958. The main cause of this sudden downward lurch in what used to be referred to as factory gate prices is cheaper oil, but even excluding oil, food, drink and tobacco, prices are stagnant.

This is indeed a new world we seem to be moving into – one not just of low inflation but possibly of price deflation. You have to go back to the 1930s and the 19th century to find anything comparable. The low inflation of the new paradigm is there, sure enough, but where's the growth? Disappearing down the pan, seems to be the answer, for the price stagnation we are now witnessing doesn't have anything to do with the productivity gains that underwrote the new paradigm theory – rather the reverse in fact. The cause is something much less complicated and rather more familiar, a contraction in demand. Businesses are desperately trying to get higher prices to stick, but the market just won't take it.

The end result is that productivity in many businesses is now going backwards, with labour and other expenses still in expansionist mode but without the growth in sales to justify them. Across the board, businesses are trying to rid themselves of the flab and waste built up in the good times, which in itself cuts demand even further. There is a real danger of a vicious circle developing.

To reverse the trend, policy makers need businesses to start investing once more, and consumers to keep spending. Cash appears still to be in plentiful supply, interest rates are now extraordinarily low, and consumers remain confident, so the conditions ought to be there for a new wave of investment.

Unfortunately, the flip side of the low inflation, low growth story is that it becomes that much harder in such an environment to make a decent return from almost anything. Don't forget, in a deflationary world, you make money simply by leaving it in the bank. Other forms of investment don't offer the same risk free attributes.

So yes, a new paradigm looms. Business leaders and investors can only hope it proves as illusory as the very different one everyone was talking about a few years back..

Progress at WTO

Over the years, the World Trade Organisation and its predecessor organisations have made a huge contribution to dismantling barriers to global trade. But progress has been hard fought and painfully difficult to achieve. So we shouldn't be surprised that the present conference in Doha, Qatar, has so far failed to produce much in the way of headline grabbing breakthroughs. The important thing is that the conference is happening at all, given the present parlous state of international affairs and the breakdown that occurred in Seattle two years ago.

The figures are open to challenge, but according to the World Bank, scrapping all remaining barriers to trade around the world would add nearly £2,000bn to global wealth, of which more than half would accrue to the developing and third world.

That prize seems in itself worth fighting for, but equally important is defending what's already been achieved. The hiatus in progress since Seattle is worrying enough, but since then there has also been a collapse in growth in world trade from 13 per cent in 2000 to around 1 per cent annually at the moment, one of the most precipitous falls in modern times. In the developing world, the situation is much worse with many countries experiencing a 10 per cent or more drop in demand for their exports.

As the world slides towards recession, the temptation to impose new barriers to trade grows, even though the tit for tat effect of such measures invariably does more harm than good. It is therefore vital to everyone that the case for free trade is defended and advanced.

Only one deal of any significance has so far emerged, although there is good cause to hope for others. Interestingly, this is the one to do with allowing poor countries to break the rules on drug patents. On the face of it any such measure would seem to run counter to the principles of free trade, of which patent protection is plainly one.

The big drug companies got themselves into a terrible hole trying to defend it in South Africa, where the subtleties of the argument got entirely lost set alongside the scale of the humanitarian crisis caused by Aids. It was a big lesson. The West cannot afford to be purist on these issues. To advance the overall cause of free trade, there have to be further concessions of this type.

Pension fund loss

Saturday's outlook column referred to pension funds having lost a fifth of their value over five years. The correct time span should, of course, have been two years. Most are still substantially up on a five year view.

j.warner@independent.co.uk