Shares and pound fall as gloom grows

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The Independent Online
THE pound and the London stock market fell yesterday as despondency about the state of the British economy deepened and the latest US employment report suggested the US recovery may be faltering.

Underlining the concern over the UK economy, official figures showed yesterday that business failures are continuing at a depressingly high level, even though the number of company and individual insolvencies fell marginally in the second quarter of the year.

The pound and the dollar sank further and London shares closed just a shade above the low point for the year. There were suspicions that the Bank of England had stepped in to support sterling, which remained pinned to the bottom of the European Monetary System.

In London, sterling ended 0.18 pfennigs lower at DM2.8267, close to its all- time low against the mark since entry to the exchange rate mechanism.

Analysts said that, in addition to the economic gloom, sterling was under pressure from the continued debate over devaluation. George Magnus of Warburg Securities said: 'The financial markets are reflecting the parlous state of the UK economy. It desperately needs a big cut in interest rates.'

After the London close, the US Federal Reserve and the Bank of Canada bought dollars in two waves of intervention to counter the decline. The dollar had retreated as hopes of a stronger US employment report for July were dashed.

The US currency sank by 1.5 pfennigs to DM1.4655. But after the Fed stepped in, the dollar rose in New York to DM1.4725. Despite the recent reduction in US interest rates, there were fresh expectations yesterday that the Fed may have to reduce rates again in the autumn if economic growth continues at the present lacklustre pace.

The FT-SE 100 index meanwhile dropped by 27.5 points to end at 2,350.1. Investors expressed concern over BP's decision to cut its dividend and the deteriorating state of the UK property market. They were also apprehensive about insurance company results due next week.

Yesterday's US figures disclosed that the unemployment rate dipped 0.1 points to 7.7 per cent in July. Employment outside the farm sector rose by 198,000 and the provisionally reported decline in June was almost halved, to show a fall of 63,000. But the rise in employment was less than expected and, after excluding teenagers on summer job programmes, the increase was 123,000.

Although employment in service industries and by the government rose, there was a decline in construction and manufacturing was broadly flat.

In addition, there was no change in hourly earnings or average weekly hours worked - closely watched indicators of changes in economic activity. David Cocker of Chemical Bank commented: 'This is not the stuff of which recoveries are made.'

Although the figures suggest a weak economy, they still point to continued growth. But the mood in US financial markets was bearish. 'As if the prospects of persistent stagnation were not bad enough, the US economy now seems headed for a triple-dip downturn,' Philip Braverman, US economist at DKB Securities Corp, said.

But Mark Brett of BZW countered: 'This is a passable report. The US has had five consecutive quarters of growth; the degree of bearishness is absurd.'

He added: 'The US economy has begun to stabilise.'

Official UK figures revealed meanwhile that a total of 5,816 companies in England and Wales collapsed in the second three months of the year.

Statistics from the Department of Trade and Industry show that the figure was marginally down on the first quarter but it represented an 8 per cent increase on the same period in 1991.

Individual insolvencies were 8,669 - down 2 per cent on the previous three months but 49 per cent up on the second quarter of last year.

The British Chambers of Commerce, which publishes the figures, said it was hopeful that the number of company insolvencies might be levelling off.

But Richard Brown, its director of policy, said the figures remained 'far too high'. The level of individual insolvencies was 'clearly very disappointing and cannot help consumer confidence'.

Mr Brown said he hoped that the modest fall in business failures would continue at a more rapid rate in the third quarter. 'However, until we see more firms working to full capacity we cannot expect significant relief from high levels of insolvency.'

In the year to June there were 23,072 company insolvencies, representing 2.4 per cent of all active companies in England and Wales. In the same period there were 32,215 individual insolvencies.

Figures from the Lord Chancellor's department also show that the number of court petitions for company and individual bankruptcies eased between the second and third quarters.

A total of 5,213 petitions to wind up companies were issued in the second quarter compared with 5,884 in the first quarter. The number of petitions for personal bankruptcy fell from 11,846 in the first three months of the year to 11,186.

(Graph omitted)