Strong pound is just a temporary phenomenon
COMMENT: 'Either the fundamental strength of the economy can and should lead to a sustainably higher exchange rate, or a higher exchange rate can and will damage the economy's strength, but not both at the same time'
Tuesday 15 April 1997
The other view is that the strong pound will inflict severe damage on manufacturing industry and the parts of the service sector exposed to international trade, just as it did in the early 1980s and 90s. Therefore there is no urgent need to increase interest rates because lower exports will slow growth. The inconsistency is in arguing that the causality can go in both directions simultaneously. Either the fundamental strength of the economy can and should lead to a sustainably higher exchange rate, or a higher exchange rate can and will damage the economy's strength, but not both at the same time. Those people who are propounding both points of view need lessons in logic, never mind economics.
Of the two, the latter case seems the more plausible. It may well be, as John Major and Kenneth Clarke keep insisting, that Britain is not just booming but on a fundamentally better economic path. However, the evidence for this is far from conclusive and certainly not strong enough for the financial markets to have marked up sterling by 14 per cent in six months. More likely the strong pound is due to temporary factors and will eventually end up hitting exports and slowing down the economy. Surveys suggest export orders are already weaker, even though domestic demand is still offsetting the impact on output.
If this is the case, the pound's strength will probably be a temporary phenomenon - a simple reflection of the likelihood of higher interest rates thanks to the stage of the business cycle the UK, like the US, has reached. There's also another reason why sterling will probably begin to fall back again at some stage in the next six months; the strong possibility of a Labour government. This is not because markets necessarily have anything to fear from Labour, but because Labour will almost certainly try and talk down the economy once it gets into office. Human nature dictates that every newcomer to a job shouts long and hard about the unholy mess he's inherited from his predecessor. Labour has already promised a financial audit once it gets into power and is unlikely to defer from this time- honoured habit. Unfortunately markets have an unnerving habit of believing the politicians when they say that in truth the economy is in a dreadful state.
BT should clear its final hurdle
Wembley, the scene of many a sporting triumph, is a fitting location for British Telecom's historic shareholders' meeting today to approve its merger with MCI. For the pounds 12.5bn deal, a takeover in all but name, is nothing if not grand in scale. It is unlikely that more than a few hundred of the 2.3 million BT small investors will turn up this morning, given that a yes vote is a certainty, but the occasion is no less momentous for the predictability of the outcome.
With today's egm over, there is only one significant hurdle left - US regulators. But despite the best efforts of AT&T to disrupt the process, BT would hardly have set out on the merger path if it wasn't given some kind of private assurance of success, and though clearance may be taking longer than anticipated, it must surely come.
Assured of success as it no doubt is, BT has none the less found the merger a surprisingly tough proposition to sell to the City. Why was it necessary to buy MCI outright, many wondered, when the existing Concert alliance in the international business market seemed to be outperforming similar offerings from Sprint and AT&T? Why, they also asked, was it necessary to pay over the odds to take over MCI, the biggest deal in UK corporate history?
Though BT can convincingly talk of the pounds 1.5bn worth of synergies and savings from the merger, the real truth is less palatable to all those institutional bean counters who have become used to BT's guaranteed dividends. The only realistic path open to BT to compete fully in the fast-growing global telecoms market was to take full control of MCI. If Messers Vallance and Bonfield delayed too long, a rival group would swoop in. The reasoning is basically defensive. BT has to attack the global business market because the alternative is to sit back and watch its market share in the UK steadily eroded by the competition.
What concerns shareholders, who hate uncertainty, is that with the creation of Concert plc, the BT they knew so well will gradually disappear. The merger is, genuinely, a journey into the unknown. But it is a necessary and inevitable one.
Regan 'bid' looks doomed to fail
With the Co-operative Wholesale Society's poor profit figures now out in the open, the next move in this spell-binding saga must surely come from Andrew Regan. Having parked the Lanica Trust tanks on the Co-op's lawn he must now open fire, or be forced into ragged retreat.
If he does, then things could start to get really interesting and all that has passed up to now will count only as a "phoney war". The two sides already have three PR advisers each and are already accusing each other of "black propaganda". Imagine the high jinks they will perform if he goes ahead.
We do not yet know the level, if any, of Mr Regan's support among the Co-op's members which stretch from Brixham to the Falkland Islands, where it has a single store. The Co-op says it knows of no support and that its board members all put their hands up dutifully at a meeting last week to support the 130-year-old movement. But we must assume that the 31-year- old entrepreneur has some backing or he would not have let his "bid" get this far.
Word is that he may have the backing of 10 regional societies - enough to call a special meeting. He may also have sympathisers at board level too. If there are rebels in the ranks, Mr Melmoth either does not know about them or isn't telling.
But even if the boy Regan does garner enough support to force a special meeting or force the board to consider the offer, he looks doomed to failure. Why should the CWS sell some if its most profitable businesses to a financier whose real interest is not in running them but in selling them on at a profit? If the board is to sell some of its interests at all, then surely it should itself seek a buyer willing to pay a strategic premium, and keep the upside Mr Regan wants for himself. It just doesn't make sense to sell to Lanica. Whatever happens, Mr Regan will have played a key role in the Co-op's history. As yesterday's poor profits show, the Co-op movement desperately needs to buck up its ideas if it is to fight its corner in increasingly competitive markets. Mr Regan may have galvanised the movement into action. The pity of it for him is he is unlikely to see a penny for his trouble.
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