Don't be so miserable, Gordon, it's good news

Economic news in the past few days has been staggeringly good. The headline inflation rate at 1.1 per cent is the lowest since 1963, the frenzied summer of the Profumo Affair and Harold Macmillan's last hurrah. Unemployment figures were down yet again to 1.21 million, the lowest figure since 1980, when voters were coming to terms with Margaret Thatcher, and still not liking what they saw. Both statistics come from a different era in modern British politics.

Mrs Thatcher would have known exactly how to react. She would have bustled across Downing Street, looked the cameras in the eye and said: "Rejoice, rejoice." But there was no celebration last week; rather, the wringing of hands. The Chancellor of the Exchequer managed to make his announcement that he expected the British economy to grow at 2.75 per cent next year, and perhaps by 3 per cent in 2001 sound like bad news. With his parsimonious Scottish manner, Mr Brown suggested that he will go down not as the Iron Chancellor, but as the leaden one.

Because economic prospects are so promising, Mr Brown agreed with the monetary policy committee's decision to raise interest rates to 5.25 per cent. This is emblematic of New Labour. The Chancellor seems to have developed a Blairite attitude to industry, which is that it is history. Perhaps we should not blame him because, in Mr Brown's own constituency, industry is very nearly history. But the British economy cannot survive solely on the magnificent baubles provided by the service industries. Not even on the gold-paved streets of the City of London - as we shall soon see.

Good economic news should not be allowed to obscure the dangers that lie ahead, and, in any trade cycle, those always exist. But the Chancellor has become too acutely aware of the threat that labour shortages will lead to wage inflation. He openly admires the MPC for having taken a hedge against it, despite the wounds this opens in industries manufacturing goods for export. The proceedings of the TUC last week do not arouse fears of a ravenous beast capable of frightening employers into paying inflationary wage increases. If house prices are the problem, interest rates will have to rise by 2 per cent to bring them down - too high a price, to exert control in an aberrant market.

Since there is no sound economic or statistical reason for the Chancellor's tight-lipped caution in the face of success, we must look for a psychological one. His age may be the key to it. Mr Brown was 12 when inflation was last at 1.1 per cent, and only 19 when unemployment was last as low as it is now. Like the rest of his generation, the Chancellor learned to expect the worst of the British economy. His twenties were spent contemplating stagflation, that combination of rising inflation and unemployment that was the despair of Keynesians everywhere. Growing up, Mr Brown's instinct was to expect one variety of economic disaster after another. The psychology is founded on failure, and the effect of it is to make good news hard to believe in.

This instinctive pessimism is defined now by popular attitudes to inflation. Instead of applauding an inflation rate that meets the Treasury target of 2.5 per cent, we tend to deplore the fact that our investment returns are falling, and recall more cheerfully the days not so long ago when the return was 8 per cent, even if that was a consequence of higher inflation. The concept of the real rate of interest is proving difficult to absorb.

Attitudes are unlikely to change until they are formed by a generation that has grown up with low inflation. In the meantime, most of us will remain incredulous, suspicious and unhappy. It is a miserable way of coping with good news. It would help if the Chancellor could rejoice. Even a bit.

Hidden City

BRITAIN'S most successful exporter is the wider City of London - the one that includes Canary Wharf and Edinburgh. Last week, British Invisibles published its annual City Table, and it showed that overseas earnings in the UK financial sector reached a formidable record of pounds 31.9bn in 1998, an increase of a quarter on 1997. Some of those City bankers and traders may actually be earning their bonuses. But, believe it or not, those statistics do not tell the whole truth.

Since Big Bang 1986, so much of the City has been sold off to foreign banks and securities houses that British companies now hold only a minority shareholding in the industry. This sale produces a statistical paradox; whenever foreign banks lose a lot of money, as they did in 1998, they pump new capital into London and that appears as an increase in investment income. Last year, this was counted in billions lost when banks could not close loss-making positions in derivatives markets. Those losses on derivatives came to more than pounds 3bn. A second boost, the nation's invisible earnings in hard times, is attributable to banks reducing risks by increasing the spreads on their loans. The margins on lending to, and borrowing from, non-residents amounted to pounds 5bn last year, a seven-fold increase on 1997.

The record of London's financial sector is remarkable, but a more stable year like this one means that next September's City Table will almost certainly show falling net overseas earnings. The fetching paradox is that this ought to be interpreted as good news.

What price romance?

IT is a sure way to take the romance out of the works of the greatest romantic artists, but modern accounting methods now employ studies of discounted cashflows and make 10-year income projections to arrive at an arithmetical calculation of an artist's worth. Using this prosaic method, the music publisher Boosey & Hawkes decided to acquire the copyright on 40 works by Rachmaninov, including his most popular piece, the Rhapsody on a Theme by Paganini. Since his wonderfully extravagant music has only 14 more years in copyright in the UK, the future cash projections must have been inspiring. But Boosey & Hawkes knows a thing or two about turnover on Rachmaninov's music. It controls the copyright of the Rach 3 (his third piano concerto), which provided the climax of the award-winning film, Shine. "That was good for us," says Boosey & Hawkes' chief executive, Richard Holland.

But what price do you put on Rachmaninov's art? A decent sum of around pounds 3m for 40 works and arrangements, apparently. Discount the cashflows, and just think how much the Britten estate must be worth.

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