City expects more rate
cuts amid fears of
recession
David Smith, Davos
BRITAIN's economy will shrink by 0.5% in the first half of
this year and even a recovery in the second half will give an
overall rise in gross domestic product of only 0.2%,
according to the latest Ernst & Young Item Club forecast, to
be published tomorrow.
Manufacturing output will drop by 2.3% this year, it predicts,
using the Treasury's model of the economy. And, while the
recession is described as "minor" and "short-lived", with the
economy projected to grow by 1.5% next year, it warns of a
400,000 rise in unemployment this year to 1.7m.
The Ernst & Young Item (Independent Treasury economic
model) forecast will also warn of an even gloomier outlook
for Britain if the European economies experience a sharper
downturn than it is projecting. Growth of 1.25% this year in
Europe, rather than the 2.25% assumed, would result in a
drop of 0.8% in Britain's GDP, with only a 0.3% rise in the
following year.
The forecast comes ahead of a key meeting of the Bank of
England's monetary policy committee. MPC members met
on Friday to consider the latest data after four successive
cuts in official interest rates. They will meet again on
Wednesday before announcing their decision at noon on
Thursday.
The February meeting is an important one because it will
incorporate the Bank's latest thinking on the economy for its
quarterly inflation report, to be published in 10 days. A
failure to reduce rates this week would imply that 6% base
rates are consistent with the Bank achieving the official
inflation target of 2.5% and raise doubts about further
reductions.
Most analysts believe, however, that the MPC will continue
to cut this week. According to a survey by Idea, the
financial-research company, 63% of analysts expect a cut in
rates this week, with 37% predicting no change. Most of
those predicting a cut expect it to be a quarter of a point,
although some expect a half-point reduction. Analysts also
predict further reductions in the coming months. The median
expectation is that rates will drop by a full percentage point,
to 5%, before the period of rate-cutting comes to an end.
The National Institute, in its latest forecast, published on
Friday, predicted a "soft landing" with the economy growing
by 1% this year. It warned, however, that the economy
could already be in a "technical" recession, defined as two
quarters of declining GDP, and said further cuts in interest
rates would be needed to stimulate demand.
According to the Item Club forecast, there is also plenty of
room for the MPC to cut rates further. It predicts 5.25%
rates by late spring and says inflation will remain close to the
official 2.5% target for three years.
***************
Small businesses should be less vulnerable to a downturn
than they were in the last recession, according to a Bank
report, writes Ricky Dalton.
The report says relationships between small firms and their
banks, in terms of exchanging information, have improved
since the early 1990s.
Many small businesses are now financed in a more
appropriate way than they were in the early 1990s. This can
be seen in the falling level of small-firm debt, the growing
variety of finance used and the shift to longer term lending.
The quality of small businesses is also generally higher now
than in the late 1980s. Entrepreneurs are better equipped to
establish new businesses, according to the Bank's sixth
report on finance for small firms.
This will be good news for the small-business sector, which
has lost some confidence in the economic slowdown.
But, although the small-business sector as a whole appears
stronger than in previous economic cycles there is still
concern that many small firms are concentrated in vulnerable
sectors such as construction, business services, wholesaling
and retailing.
***********
Consumers hold the key
WHEN the euro was launched a month ago, almost every
economist, fund manager and pundit - my colleague John Jay
was an exception - thought the new currency would bound
onto the world stage with a sustained show of strength. The
Murphy's law of the consensus duly applied, and the euro has
been a seven-stone weakling, which could do with a little help
from Charles Atlas. In fact, its curiosity value barely lasted a
week and, while some arguments about rising portfolio
demand for the euro over the medium term remain intact, for
the moment it is being dragged down by the economic gloom
starting to envelop Europe.
This Thursday, the European Central Bank's (ECB's) council
and the Bank of England's monetary policy committee
(MPC) will announce the results of their latest monetary
deliberations. Many in the markets, it appears, think there is a
better chance of an interest-rate cut from the ECB than the
MPC.
Only last week, there were strong City suggestions, said to
be based on conversations with MPC members, that the
period of rate-cutting in Britain had ended and there would
now be an extended pause. I find this hard to believe as I try
to put myself into the MPC's shoes. Last time I thought the
MPC would wait for more data before cutting again, but in
the event only one member, Ian Plenderleith, voted this way.
This time, the argument is that recent data -
stronger-than-expected fourth quarter gross domestic
product, above-target December underlying inflation and the
start of a recovery in business confidence - will stay the hand
of the entire MPC.
But I think that would be a strange response. Having had a
look at the fourth-quarter GDP figures, my initial suspicions
about the data were confirmed. Only by slotting in stronger
growth in the fourth quarter than in the third for all those bits
of the service sector nobody has good information on did the
Office for National Statistics get its 0.2% rise. Had it been
0.1%, the headlines would have said "Britain teetering on the
brink of recession". Because it was 0.2%, they said "Britain
heads for a soft landing". It will take more than the ONS's
tentative stab at the figures to convince me of the latter and I
would expect the MPC to take a similar view.
Meanwhile, last week's Confederation of British Industry
quarterly trends survey was surprisingly gloomy. The
recovery in confidence, given that the previous survey came
at the height of last autumn's financial storm and before most
of the Bank's rate cuts, was modest, particularly since there is
always a January bounce. The overall message, particularly
on the strength of domestic demand, was grim. Even the
National Institute of Economic and Social Research's forecast
of 1% growth this year requires further rate cuts.
I also hope, and expect, that the MPC will treat the
December inflation upturn as the blip it was. Unless I have
missed something - and remember Brazil has come along
since the MPC last met - I can see no reason not to cut rates
again.
Whether or not the ECB cuts rates this week, and many of
the politicians attending the World Economic Forum in Davos
are urging it to do so, the prospect is of lower European
rates, with Europe's target interest rate set to drop from 3%
to 2.5%.
The significance of this is not that European rates are falling at
the same time as British rates. It is that they are falling when
they are not doing so in America. European politicians,
starting I think with Dominique Strauss-Kahn, the French
finance minister, use an American analogy to describe what
they want of the ECB - it is "Clinton-Greenspan". They will
keep their side of the bargain and control budget deficits as
long as monetary policy is accommodating enough to keep
the economy sailing along. What they do not want is
"Volcker-Reagan", in which fiscal policy was too loose and
monetary policy too tight.
Greenspan cannot cut rates at this time with America's
economy as strong as it is. But with Europe's economy
weakening, and several euroland economies near to or
actually experiencing deflation, there is room for the ECB to
act.
Already a head of political steam is building up against the
euro, some of it over excessive secrecy. The joke from Wim
Duisenberg, the ECB president, that he might publish the
central bank's minutes after 16 years, appears to have had
much the same effect as Gerald Ratner's "crap" quip. If the
ECB does not show itself responsive to the European
slowdown, it could jeopardise the entire euro project.
Sometimes you can weaken your currency by not cutting
interest rates. If the ECB moves too slowly and the euroland
economy slows more sharply, the euro will end up weaker
than if rates had been cut speedily.
This brings me to a second point. One of the big questions at
the Davos World Economic Forum is: "Will the Wall Street
bubble burst?" If it does, people say, American consumers
will stop spending and the world economy will hit recession. I
will leave that one to my neighbour Irwin Stelzer, who is
closer to it. Suffice it to say there is something of a consensus
among economists that the bubble will eventually burst. This
may mean, if the law of consensus mentioned above applies,
we can relax.
Amid all the talk about American consumers as the motor of
global growth, though, we ignore other people closer to home
and more significant for Britain - European consumers.
The German government has just lowered its 1999 growth
forecast to 2% against 2.8% last year. Throughout Europe,
the global slowdown is taking its toll. A new Dresdner
Kleinwort Benson forecast suggests euroland growth will be
only 1.7% this year, with German growth just 1.3%.
Watching Europe struggle a little following the launch of the
euro may look like good sport, but it has a dark side for
Britain. The new Ernst & Young Item Club forecast, using the
Treasury model, emerges tomorrow. It has Britain growing
by just 0.25% this year (with a technical recession in the first
half), on the assumption of 2.25% euroland growth. If
euroland growth slows to 1.25% - and the Dresdner forecast
is halfway there - Britain's economy will shrink 0.75% this
year, according to Item.
So far, the continental slowdown has been mainly due to
lower export growth. European consumers remain optimistic
and continue to spend. But what if, as in Britain, fears of
rising unemployment, with the jobless total rising in Germany,
start to weigh on spending?
Last week I attended a Downing Street lecture by Professor
Jonathan Gershuny. It was a hymn of praise to the northern
European social model. We in Britain should limit our
working hours, he suggested, and we should cut out low-paid
service-sector employment, particularly domestic-service
jobs such as nannies. It took Will Hutton, I am pleased to
say, to point out that countries such as Germany would love
to generate such jobs but cannot. In Britain when
manufacturing jobs go, there is at least compensating growth
in service-sector employment. In Germany and several other
European countries the route from manufacturing job losses
to unemployment is a direct one.
So Europe's economy is in danger of something worse than
just slowing if people lose their nerve, and the consequences
for Britain would be grave. We should worry about the
American consumer. But we should worry even more about
consumers in Europe.
E-mail should be addressed to:
[log in to unmask]
Interest rate cut is still
expected
***************************
THE European Central Bank president, Wim Duisenberg,
was pressed on interest rates by Dominique Strauss-Kahn,
France's finance minister, in Davos. But he said he was used
to finance ministers' pressure and noted there were only 11
euroland finance ministers against 17 ECB council members.
Pressure or not, lower rates are expected.
High labour costs
IF THE single currency is to mean a convergence of labour
costs there is a lot of converging to do. Calculations by
Eurostat and Rexecode show that hourly industrial labour
costs in the 11 euro member countries range from 7.51euros
an hour in Portugal to 28.68euros in Germany, almost four
times as much. Those in between include Spain at
13.32euros, Ireland at 15.41euros, Italy at 19.12euros,
Finland at 21.47euros, the Netherlands at 23.42euros,
Austria at 24.6euros, France a 25.53euros and Belgium at
26.15euros. The figure in Britain is 18.06euros.
Irish growth soars
WHILE most European states are searching for more
growth, Ireland has too much. Irish retail sales rose 3.3% in
November last year and were 8.7% up a year earlier. Such
strength preceded December's co-ordinated European
interest-rate cut to 3%. Irish consumers, at least, did not
require any such confidence booster.
Germany's errors
THE German chancellor Gerhard Schröder admitted to
mistakes in his first 100 days in government and pledged to
focus on cutting unemployment. "We set a high tempo,
sometimes too high a tempo," he said. Business confidence is
falling and Schröder has had a row with Britain and France
over nuclear reprocessing.
************************************
Brown bases budget on
higher growth
by David Smith
Davos
and Michael Prescott
THE chancellor is to stand by his much-criticised economic
growth predictions in his forthcoming budget in the wake of
news that America's economy grew by an annual rate of
5.6% during the last three months of 1998.
Gordon Brown's decision flies in the face of recent reports
that he is poised to slash his forecast that Britain's economy
will grow between 1% and 1.5% this year. Any such move
would have heralded a possible crisis in the public finances,
given the government's pledge to plough more money into
public services such as health and education.
Brown and his officials have been heartened by news from
America and by signs of increased business confidence.
"One to 1.5% looks pretty good to us," said one Treasury
insider. The forecast is subject to revision ahead of the
budget on March 9 but only a run of bad news will cause a
change. Brown's budget is also likely to see him at last
announcing the launch date for his oft-promised 10p starting
rate of income tax. The tax, which will apply to the first few
hundred pounds of taxable income, will be introduced in
April 2000 when the new working families tax credit is in
operation.
Some sources suggest the chancellor will finance the new
lower tax rate by phasing out mortgage tax relief. Tax relief
on home loans is available at a 10% rate on the first £30,000
of a mortgage.
Any attack on the tax relief is a sensitive political matter,
given Tony Blair's insistence on ensuring continued
middle-class support for new Labour.
Interest rates are, however, expected to continue falling and
the Treasury believes that clears the way for a painless
attack on mortgage tax relief.
The move will also bring Britain more into line with the rest
of Europe in preparation for our eventual entry into the single
currency. Stephen Byers, trade secretary, will attempt to
reinforce business confidence when he makes his Mansion
House speech in the City of London on Tuesday. He is to
take Blair's pro-market Labour revolution to new extremes
by becoming the first member of the cabinet to state that
wealth creation is more important than wealth redistribution.
"The Department of Trade and Industry has an important
role to play in creating an environment which encourages
enterprise and creates wealth and jobs," he will say. "The
reality is that wealth creation is more important than wealth
redistribution.
"The reason for this is clear. It is successful and prosperous
businesses which can employ more and more people and
also ensure that our public finances are sound, so that we
have the resources to fund those essential public services in
areas like health and education."
The government will announce pay rises for public sector
workers this week. Workers in areas where the state has
particular problems in recruiting and retraining staff are in line
for increases well above the 2.8% inflation rate.
Head teachers at primary schools will receive an average of
6%, with some receiving as much as 9%, to alleviate
recruitment problems.
The government is braced, however, for some controversy
over its treatment of higher-earning public servants. Some
sources suggest that senior army officers, judges and civil
servants could receive pay rises of less than 2.8%.
The Treasury's upbeat view of the economy is in line with a
forecast produced last week by the National Institute for
Economic and Social Research, which predicted 1% growth
this year. It contrasts, however, with a new set of predictions
to be published tomorrow by accountants Ernst & Young,
using the Treasury's own model of the economy.
It predicts that the economy will shrink in the first half of this
year and overall growth for the year will not exceed 0.2%.
Unemployment, it predicts, will climb by 400,000 this year.
Part of the Treasury's optimism is based on the fact that
interest rates fell sharply last autumn. The Bank of England's
monetary policy committee has cut rates at each of its past
four meetings. City analysts expect the committee, which
meets again on Wednesday and Thursday, to reduce rates
again this week.
*********
The employment relations bill, published last week, gives
workers many additional rights but will be a costly
burden on small companies. Firms that employ young
people likely to start families will be hit particularly
hard. This week in a special column our experts address
the key issues owner-managers will face
Workers rule OK but
what about the
employers?
How much are all these new regulations going to cost
small businesses?
The regulations will cost every business thousands of pounds
by increasing the burden of red tape.
They will have to pay to introduce and monitor the
regulations. Most employers will also have to pay and train
temporary workers to cover the additional periods when a
firm's permanent workers are away enjoying their new
entitlements. Companies' productivity will inevitably fall as a
result and workloads on the remaining staff members may
well have to be increased.
How will the trade union legislation fall on firms?
If you have fewer than 20 workers you will not be affected
by the trade-union legislation in the bill.
Larger firms will have to recognise trade unions if a majority
of their staff request it or if 40% vote in favour of
recognition.
Companies will be prohibited from blacklisting or
discriminating against workers who are union members or
involved in union activities.
Workers will also have the right to be accompanied by a
union official when attending a disciplinary or serious
grievance hearing.
How can employers plan for the legislation?
Employers will need to carry out an internal audit of their
workforce to identify which departments, systems and
functions are likely to be particularly affected.
Companies may not wish to consider employing young
people who are likely to start a family (see below) - the very
people the new legislation is aiming to help.
How is this connected with other recent employment
law?
The legislation is all part of the European social chapter,
which is seeking to strengthen workers' rights.
Other recent legislation includes the working-time regulations
bill, which limited the working week to 48 hours averaged
over a 17-week reference period.
The minimum wage is also expected to be introduced in
April. The public interest disclosure act, which protects
so-called "whistleblowers" against unfair dismissal, is
imminent too.
All will place extra costs and administrative burdens on small
businesses.
What are the new maternity regulations?
Every mother is now entitled to 18, rather than 14, weeks of
maternity leave from the day she joins. Anyone who has
worked for the firm for more than one year when the baby is
due, rather than the current two years, can take 40 weeks
off. Therefore, anyone who falls pregnant after 12 weeks'
employment will be entitled to almost 10 months off.
Employers have to pay new mothers 90% of their salary for
the first six weeks, then £60 a week for the following 12
weeks. Though the remaining 22 weeks are unpaid,
employers have to keep the women's jobs open and the
workers are entitled to their existing company benefits
throughout their maternity leave.
This is always a period of uncertainty for employers over
whether a worker will return and this shortening of the
qualification period can only increase the uncertainty.
What about the fathers?
The new rules do not specifically mention paternity leave, but
during the first eight years fathers, or mothers, will be able to
take three months' unpaid leave whenever they wish. But
they do not have to take the time off in one block and could
take, say, eight days off unpaid a year for the next eight
years.
The regulations do not specify what will happen if fathers
change employers within the eight years and what records
employers will be forced to maintain.
Mothers and adoptive parents are also entitled to this time
off, on top of any maternity leave. In a case where a small
business employed both parents, it would face losing two
valuable workers for long periods on top of existing holiday
periods.
Can workers take time off for any other reason?
Yes, workers will be entitled to take unpaid time off to deal
with family emergencies or domestic incidents.
No explicit guidance has been given on how much time off
workers can reasonably take. Employers will need to
formulate rules for reporting such time off and again the
employer will need to maintain records to justify salary
deductions for time off.
Industrial tribunals, which will be expensive and
time-consuming, are expected to determine what is
reasonable.
To what greater protection will workers be entitled?
All part-time workers have to be given the same legal rights
as full-time workers enjoy. The maximum compensation
award for unfair dismissal has been increased from £12,000
to £50,000. This is likely to encourage more workers to go
to a tribunal, which will greatly increase the costs in money,
time and lost opportunity for small employers who will
undoubtedly need to incur the cost of legal representation.
Fixed-term contracts will not be allowed to include an
unfair-dismissal waiver clause. This could limit a firm's ability
to take on staff for specific term projects, hindering
expansion plans.
Where can employers go to find out more?
Professional organisations such as the Confederation of
British Industry, the Institute of Personnel and Development
and the Institute of Directors should all be able to help
owner-managers.
The above articles are from the Sunday Times 31.1.99
http://news.bbc.co.uk/hi/english/business/the_economy/newsid_265000/265156.stm
>From BBC Online
Ernst & Young predicts 'rosy' outlook
for UK
By Bill Jamieson
BRITAIN'S economic prospects over the next two
years "look extremely
rosy with buoyant economic growth and low interest
rates", according to the
most optimistic economic report for more than a
year.
The latest Ernst & Young Item Club forecast,
published tomorrow, will
mark a startling break from economists' gloomy
predictions since the
beginning of 1998. The report still forecasts that
the economy will "teeter
into a technical recession in the first two
quarters", and that growth for the
year overall will be a meagre 0.2 per cent.
But, helped by interest rate cuts, Britain will
enjoy a "unique" upswing, with
growth rising to 1.5 per cent in 2000 and 3.25 per
cent in 2001.
The report comes as the Bank of England's Monetary
Policy Committee
ponders whether to cut interest rates again when it
meets this week.
Business confidence, while flattening out, remains
at a very low level. The
inflation outlook still looks subdued, with January
price discounting still to be
reflected in the Retail Prices Index, currently
running at 2.8 per cent, with the
core targeted rate at 2.6 per cent.
The decision for Eddie George, the Bank's governor,
and his committee is
finely balanced, with a quarter point cut widely
expected. But, after four
successive reductions since October, from 7.5 per
cent to 6 per cent, and
with evidence of a slight recovery in consumer
confidence, the committee
may decide to take a breather and defer a further
cut until early March. A
Confederation of British Industry Distributive
Trades Survey due out this
week is expected to show a stronger trading pattern
in January after dismal
figures in December.
Peter Spencer, author of the Item Club report,
believes there is scope for
significant cuts ahead in interest rates - Item
predicts three quarter point base
rate cuts through spring 1999, hitting 5.25 per
cent by the summer and falling
to just 4.25 per cent in the medium term.
Spencer says: "The medium term outlook looks quite
impressive when seen
against the background of a shaky world economy.
The US is suffering from
an extravagant demand side, while Europe is
handicapped by a rigid labour
market. The European economy is also exposed to a
weak export market at
the moment.
"The main threat to the rosy outlook for the UK
economy in the medium
term comes from a shaky world economy, not from the
spectre of UK
inflation." This cautionary note was underlined by
deepening nervousness in
Brazil and a further collapse in the currency,
stretching the devaluation just
over two weeks ago to 40 per cent.
Reserves have already been halved and the
authorities were forced to deny
reports of a special bank holiday tomorrow to
announce emergency
measures.
***********
Tesco offers free Internet access
By Neil Bennett
Tesco Online
TescoNet
TESCO is mounting a head-on challenge to Dixons in
the increasingly bitter
battle of the Internet browsers by offering free
Internet access to all 10m of
its Clubcard holders.
The dramatic offer comes less than six months after
Dixons became the first
British company to offer free Internet access
through its Freeserve service.
Freeserve now has more than 900,000 customers.
Tesco is launching the offer to revitalise its
Internet business which stalled
after the Dixons' offer. When Tesco launched its
Internet service in July last
year it was the cheapest in the market but so far
the store has attracted only
17,000 customers due to Dixons' success.
Tesco's free offer is the first stage of a major
increase in its online retailing
business. The group plans to launch a baby and
toddler range on the web
this spring in a joint venture with Grattans, the
mail order house. Meanwhile,
the group is refining its food shopping service on
the web, which is currently
only available in London, and hopes ultimately to
roll out a national service.
Despite teething troubles, Tesco's Internet service
is already generating more
than £12m a year, equivalent to one large
superstore. The group also says it
plans to develop on-line banking services through
its personal finance
subsidiary. The group is thought to be in talks
with other retailers about
extending the service further.
Tesco customers can download the free Internet
access service on Tesco's
web site. Alternatively, they can buy a starter
pack, including a CD-rom
from any Tesco store for 50p. In an effort to put
Freeserve under pressure,
Tesco has decided to charge 50p a minute for the
service's help line, half the
price of its rival.
The above articles are from the Sunday Telegraph 31.1.99
Enjoy your Sunday reading!
chris
