Eddie faces some tough choices
Sunday 06 September 1998
Russia has imploded, the Far East is putting up the shutters on the rest of the world, stock markets and commodity prices are plunging, the pound is back up to a level which makes the pips squeak in manufacturing, and everyone's talking about global recession.
Perhaps most striking of all, the storm afflicting world markets has struck at the heart of the Prime Minister's own constituency with news that Fujitsu is closing its microchip plant in County Durham.
A month ago, many indicators still pointed to the need for another hike in rates. It's hard to argue that case now. Surely the time has come to cut interest rates.
Well perhaps, perhaps not, but one thing you can be sure of with the MPC is that it is not going to be bamboozled into it. Preparations for this week's two-day meeting of the MPC are already well underway. Each member is being bombarded with information and analysis on everything from the bear market in equities to the price of peanuts.
These preparatory sessions are like vigorous academic seminars, with often as many as 50 economists and officials crammed into the room.
The debate moves swiftly from the esoteric to the heated and back again. Even those sitting through them still have little clue as to which way the MPC will jump. DeAnne Julius, the MPC's resident dove, probably knows already how she's going to vote, but I doubt the rest do.
As always in these cases, there is a key difference between what we all think the MPC should do, and what it will do. As to what will happen, I suspect rates will be left on hold. Economically and financially, the world looks a terrible place right now, but it is the task of the MPC to ride above the siren calls for immediate action, and take the considered, informed view. In doing so, it will be acutely conscious that the last time interest rates were cut to deal with a stock market crash - 1987 - the effect was to accentuate the latter stages of the economic boom and as a consequence deepen the subsequent bust.
In attempting to predict what the MPC is going to do, it is easy to forget what its brief is, which is to deliver on the Government's inflation target. Despite the present slowdown in growth, inflation is still rising, so much so that there is a real danger of breaching the upper 3.5 per cent limit of the Government's target range.
And while the words recession, slump and depression, seem to be on everyone's lips, the truth is that a Western recession, as defined by two successive quarters of negative growth, is still pretty unlikely.
One of The Independent's economics columnists, Gavyn Davies of Goldman Sachs, has sharply reduced his forecasts for OECD growth next year, but even in a worst case scenario - that is taking account of the full effects of the latest crisis in Asia, the Russian meltdown, its possible extension to Latin America and a continued slump on Wall Street - he is still looking for a positive figure of 1 per cent. Davies doesn't always get it right, but those predicting outright OECD recession are still very much in the minority.
Despite all this, the balance of risk in the British economy has plainly moved quite sharply in the last month away from an inflationary one towards that of stagnation or even recession.
For this reason, and on the stitch in time saves nine principle, I would urge the MPC to start cutting rates immediately. If the Bank is to leave them unchanged, it is going to have to come up with some good explanations as to why.
Mail's double blow
RAGS TO riches and back again in three generations. Yes, I know it's a tired old cliche, but it may be one concentrating Jonathan Harmsworth's mind this weekend as he contemplates the untimely death of his father, Lord Rothermere. Vere Harmsworth's extraordinary success in rebuilding his family's flagship newspaper, the Daily Mail, into the voice of middle England and one of the most profitable titles in the land, has been well chronicled, so I'm not going to dwell on it here.
It does seem to me, however, that Lord Rothermere's stewardship of the Daily Mail and General Trust, the Mail's holding company, gives a telling perspective on the nature of business achievement.
The first point to be made about the Mail is that its success was based on a unique partnership between proprietor, Lord Rothermere, and a brilliant editor, Sir David English. There was a symbiosis between the two, and neither could have flourished in the way they did without the other.
The newspaper industry is an eccentric one, but outstanding business success is quite often characterised by such partnerships, whether it be Lords Hanson and White at Hanson Trust, or Warren Buffett and Charlie Munger at Berkshire Hathaway.
When those partnerships finish, the company's progress invariably falters. Sir David's unexpected death earlier this year was bad enough, but for both of them to go in such short order is a terrible setback for the company.
The second point about the success of the Daily Mail and General Trust is that it has been achieved through a long, slow build, often involving heavy investment in journalism for an uncertain return, and on occasion by taking what seemed at the time to be quite unnecessary risks, as with the launch of the Mail on Sunday. Much of this would have been impossible in a normal, publicly quoted company, focused as such organisations invariably are on short term shareholder return.
With the DMGT, it is different. The family maintains control through a small class of tightly held voting shares, even though the majority of the capital is publicly owned.
The City is usually extremely hostile to such two-tier capital structures and hardly any of them now survive. But while the DMGT remains so successful, it has been hard to challenge.
All that could now change. The partnership that made the Mail what it is has gone and in its place is an unknown quantity in his early thirties - the heir apparent, Jonathan, who is there by right of birth, not merit.
The same could have been said of his father when he stepped into the hot seat in the early Seventies, of course. Jonathan may yet surprise us, but it's not what precedent tells us will happen.
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