The Chancellor would do well to be cautious
Friday 08 March 1996
If this was the reasoning behind a teatime meeting, it suggests the interest rate decision is particularly finely balanced. The Chancellor and the Governor must have been anxious for every extra scrap of information before they cast the die.
The case for an additional cut in base rates, widely expected this morning, rests on what is happening to bits of the economy for which we have plenty of data. Manufacturing industry is stagnant; growth in exports has fallen back because of the sharp slowdown on the Continent and the lesser dip in US growth; inflation shows every sign of having been tamed in recent months.
The optimists about the economy, who are more cautious about rates, have a less convincing battery of statistics to draw on. The CBI survey of the distributive trades pointed to another month of high street buoyancy, but official figures have not yet confirmed this trend. The full statistics for consumer spending - retail sales take a minority share - are only published quarterly and with a delay.
Services seem stronger than manufacturing but suffer the same publication lag. The housing market has shown some signs of recovery, but this not yet comprehensive. Only monetary figures and share prices point definitively to a pick-up in the economy.
In the light of this dilemma, the minutes of yesterday afternoon's meeting are bound to acknowledge how finely balanced the judgement was. But to tackle the decision as if it were a simple matter of taking out a pair of scales and weighing evidence pointing to a continuing slowdown against evidence of a recovery in the pace of growth would be deeply misleading.
What we have is an economy returning to its normal pattern of under-investment and slow growth in manufacturing, alongside a healthy service sector. It is a pattern that favours imports rather than exports and consumers rather than industrialists.
How this defect in the economy is balanced out in the aggregate statistics for growth is neither here nor there. The fact is that one policy instrument - base rates - can not target both parts of the economy successfully when they are moving in different directions.
Given the disappointing British history of over-relaxed monetary policy and higher inflation than many other industrial countries, Mr Clarke would do well to be cautious about lowering interest rates. As he himself keeps telling us, consumers as a whole will do rather well this year.
Tackling the ills of manufacturing requires a different strategy - not to mention an honest admission from the Government that industry faces a deeper and more long standing problem than another tweak of the base rate can solve.
Nearly everyone should benefit from this bid
There will be few tears in Devon and Cornwall if South West Water is taken over. It surely inspires about as much customer loyalty and affection as British Gas after those incidents of poisoned water, reservoirs emptied into the sea and charges for water and sewerage at the top of the league tables.
With cuts in water bills certain to be imposed by Ofwat, the regulator, as a condition for a takeover,the deal is nothing but good news for customers - though not for the employees who will lose their jobs as part of the planned cost savings.
Shareholders have nothing to complain about either. South West has not got to grips fast enough with its numerous problems and a deal at the prices talked about yesterday in the City would get them out at around the all time peak price, which was last seen in late 1993.
The bigger risk, of course, is for Wessex itself and its shareholders. Has it got the skills and drive to get the best out of South West? Or is this another utility management bent either on self-aggrandisement, like North West Water, or on protecting itself from a potential overseas predator by moving first against a smaller neighbour? Much depends on the exact price offered by Wessex after the mandatory Monopolies Commion report and the inevitable price cuts to be set by Ofwat. But at this early stage it looks a takeover that for once benefits nearly everyone.
Is this fashion or cold commercial logic?
It was hardly surprising that David Barnes, chief executive of Zeneca, should be railing against the "big is beautiful" school of thought yesterday. Despite the chunky pounds 12bn market size and undoubted success of his drugs group, it is looking small in the context of the rapidly consolidating world pharmaceuticals industry. Glaxo's "blockbuster" pounds 9bn takeover of Wellcome has become small beer by comparison with yesterday's pounds 41bn Swiss mega-merger between Sandoz and Ciba-Geigy. Zeneca sits dangerously exposed in the middle of this turkey shoot.
But closing one's ears to the sound of grinding axes at Zeneca, Mr Barnes has a point. The current merger mania smacks as much of fashion as cold, commercial logic. There is an air of panic amongst the big groups now rushing to pick up marriage partners. The fear of being left on the shelf and the pursuit of size for its own sake seem to be as important as any real benefits which may accrue to the groups now merging.
Cost savings were said to be at the root of Glaxo's takeover of Wellcome. Their lure, and the dazzling audacity of the move, temporarily took the eye of investors away from the real problem facing the group, which is a shortage of exciting new prospects. The share falls of the last two days suggest the City is again focusing on that lacuna, which could result in earnings growth flagging.
Meanwhile, Novartis, the new Swiss giant in the process of formation, is promising rapid returns, with close to pounds 500m annual savings in the first 18 months. But that is the easy part. The cost in jobs is expected to be around 13,000, with a third falling in Switzerland. The impact on morale will be massive.
The 1970s merger between Ciba and Geigy took years to fulfil its promise. More recently, the bitterness engendered amongst Wellcome staff by the Glaxo takeover is evidence of how sensitive highly-trained specialist staff can be.
That might be less important in a manufacturing operation, where staff are a commodity nowadays. But to build the new products pipeline which must remain at the heart of any successful drugs business requires the nurturing of expert creative staff. In drugs innovation, putting two and two together can too often make three not five. The growth drugs of the future are as likely to be found in the emerging biotech companies as in the new giants.
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