On the round with the Bank's man
Peter Koenig travels the land with a Bank of England 'reality checker'
Sunday 22 February 1998
As with all rituals, however, there will be much that is phony about it. The message will be that the Bank is responding decisively to signals from the economy. The problem is that in reality these signals are maddeningly opaque. It is therefore reassuring to watch the formulation of monetary policy close up and see that the intellectual renaissance Mr George is credited with having introduced to the Bank is real.
Stuart Iles is one of the Bank's reality checks on the number crunchers at headquarters. He is one of 12 regional agents making calls on 5,000 companies annually. He sends a summary of his economic intelligence gathering to each MPC meeting. The fact that Mr Iles - who at 51 has enjoyed a distinguished career inside the Bank, has been dispatched to the provinces is a measure of the importance Mr George attaches to reality checks.
Mr Iles's territory is central southern England - Bournemouth to Brighton to Slough excluding London. Working from a nondescript office in Winchester, he clocks 35,000 miles a year. An academic at heart with a meticulous sense of duty and an insatiable curiosity, he probably has a clearer impression of what is happening out there than anyone in the world.
The impression gained from four years of endless cups of tea with managing directors is upbeat: insecurity reigns supreme. Residents have substituted cosiness-lite - the cheerful impersonality of shopping malls and industrial parks - for the contentment based on tradition. But an economic recovery has stolen upon the region. "There is more confidence," Mr Iles says.
The Bank's man is quick to point out that the recovery is choppy. Around Reading, where the managements of Microsoft UK and other UK subsidiaries of US information giants drink cappuccino in egalitarian cafeterias, Britain is formidably integrated into the global economy. In the small businesses linked to the languishing seaside tourism industry, by contrast, local managers appear trapped in an Edwardian time warp.
Still, Mr Iles has little time for the big picture. He works to the MPC's monthly cycle. In the report he will submit ahead of the 4-5 March MPC meeting he will supply 100 pieces out of the 1,000 used by the Bank to construct its distillation of the UK economy. On Tuesday he gathered four.
Hamworthy Marine, Fleets Corner, Poole, Dorset is a pounds 50m-a-year division of engineering-and-ports conglomerate Powell Duffryn run by Kelvyn Derrick, a tall Nordic-looking man who defies the negative stereotype of mid-level British management.
Hamworthy Marine supplies high-performance rudders to the world's shipping industry. Because two-thirds of the world's ships are made in the Far East Mr Derrick is brutally exposed to the Asian crisis. But because he has moved all but the highest-end part of rudder fabrication out of the UK he is cushioned against the effects of plummeting Asian currencies and the strong pound.
Mr Derrick tells Mr Iles that despite the Asian crisis, Hamworthy output will increase this year. The firm has niche products offsetting price competition made worse by the strong pound.
Mr Iles wonders if Hamworthy will suffer increased competition from Asian companies benefiting from currency devaluations. Mr Derrick concedes his margins are "very low". But he remains confident. Mr Iles's conclusion: The "story" at Hamworthy is one of "bucking the trend" of the Asian crisis. The labour market for Hamworthy's skilled British jobs remains tight.
Driving to Wimborne, Dorset, Mr Iles calls on Giles Irwin, group financial director of Cobham plc, an aerospace company comfortably hunkered down on its own industrial park behind heavy security. Cobham specialises in a wide range of aerospace products. Irwin is just back from the US where the company is bidding with Boeing for the contract to build the Joint Strike Force aircraft. To draw out Mr Irwin, Mr Iles goes over the Bank's forecast - a dip in activity then renewed activity and inflationary pressures in 1999.
Mr Irwin makes it clear Cobham is following its own benign cycle. The defence industry may be contracting but the company has a piece of the Eurofighter contract as well as the prospect for the US JSF plane, and so is well positioned. Yes, the Asian crisis may prompt a fall-off in orders for civilian planes from the Far East. But not now, and meanwhile Cobham has diversified into supplying equipment to drill printed circuit boards.
Irwin mentions output constraints. "Labour, machines, space?" Mr Iles asks. "To be honest, all," Mr Irwin replies.
Mr Iles's conclusion: Cobham is going strong and the market for its skilled labour is tight enough to force the company to offer 7-8 per cent pay hikes in specific skilled areas, offsetting this cost by productivity gains and below-inflation hikes to unskilled labour.
After lunch Mr Iles goes to the executive offices of Beale's, the Bournemouth- based department store chain. Chief executive Michael Mitchell is cautious. His message is downbeat. "We are absolutely at the top of the retailing cycle now," he says. "We all had a good winter sale. But the question is: which of us bought it at the price of heavy discounting?"
Mr Iles's conclusion: Beales' volume is up 8 per cent in the nine weeks since 1 November. Despite Mr Mitchell's caution, that's a favourable trend. And Mr Mitchell also spoke of tightness in the labour market.
Mr Iles' last stop is the privately-held pounds 80m-a-year Dean & Dyball construction company in Ringwood, Hampshire. Its finance director Ken Macintosh offers the plainest dialogue of the day. D&D specialises in building sea defence walls, where construction was slow last year.
D&D has diversified into building schools and industrial park tin sheds. But competition is fierce, so margins are thin. "Please don't raise interest rates," Mr Macintosh says. Mr Iles speaks of the global economy. He acknowledges the Bank faces a dilemma - how to moderate domestic demand without undue upward pressure on the pound. His conclusion: the construction industry needs a shakeout.
On the ride back to Winchester Mr Iles shies away from drawing any conclusions based on the day's four company visits. But the message, surely, is that the MPC will raise interest rates at its 4-5 March meeting? "We only saw four pieces of the jigsaw today," he says. "Many more need to be assembled."
On the page this sounds like public relations stonewalling. Sitting beside Mr Iles in his hardworking car, you not only believe him, but come away impressed at the pains the Bank takes to distill its point of view on what the economy is doing.
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