George Pitcher: All eyes on Uncle Sam as the low-brows take over

George W. moves into the Whitehouse just in time for the US economy’s crash landing. But, who will be cooking the books when the slump hits here?

‘Tis the season to be jolly, as journalists won’t have tired of telling you for days. Most of you, of course, work outside the winter wonderland of the media and consequently will not have had much as yet to be jolly about. If you’re a retailer of anything other than mobile phones or black-market PlayStation 2s, then you’ll no doubt be treating your staff in a manner that would make Bob Cratchit feel like Goldman Sachs’ lead salesman.

But the tradition, I’m afraid, is for one of the two great festive standbys of the columnist – the quiz or the almanac. With the party bore’s self-assurance that we all love a figgy pudding (or some such tosh), I’ve decided to present you both with a quiz and with my predictions for 2001.

My quiz is just one question in length, but be warned – it looks deceptively simple. At least, to my mind it is more challenging than it appears. Others may have the answer in a trice, or think they do. The complication is that we won’t know the answer for 12 months. I supply my own answer at the end of this column.

The question is this: Who will be Chancellor of the Exchequer at this time next year? a) Gordon Brown; b) Robin Cook; c) Peter Mandelson; d) Michael Portillo. In the unlikely event of my answer proving incorrect, I will send a magnum of socialist champagne next Christmas to the person who turns out to have sent me the first correct answer that I open on 2 January 2001. Please don’t feel confined to the names on the list – there are loonies out there who fancy Menzies Campbell.

So that’s the quiz done. Now to predictions for next year. Readers won’t be surprised to hear that I take a very doleful view of 2001. Whatever the Chinese might have you believe to the contrary, this will be the Year of the Bear. We have waited long and with trepidation for a major correction in the US equity markets and economic circumstances conspire to make it almost an inevitability in the coming year. Sometime early in the second quarter would be my guess.

Questions over the sustainability of US economic growth have intensified recently – it’s not just the perennial bears anymore who predict a slowdown. In fact, the slowdown is already under way, leading the US Federal Reserve to talk about a “looser” policy on interest rates. Meanwhile, Morgan Stanley in New York lets it be known that “the business cycle is back – and possibly with a vengeance.”

The key turning point for business valuations will come when America’s nationwide army of retail investors switch from being investors to savers. Once they start selling into a falling market, then we’ll really be on the slide into a US recession.

The Bank of England this week seems fairly relaxed about the US market, which is a further reason for us to be really scared. The Bank looks at the kind of earnings growth that is required to justify an increase in US market valuations of some 80 per cent since 1997 and concludes that the answer is 3.23 per cent, against a historical 2.5 per cent. That projection is not beyond the bounds of reason. But what the Bank doesn’t take into account is that the US market was already up 60 per cent in the two years prior to 1997. American markets have boomed on the back of a boom. It follows that we’re owed a bust before the one we’re about to have.

But the figures are only part of the story. Nine judges in the US have just elected the most intellectually-challenged president in living memory, which is saying something. George W. Bush’s response to clean-air proposals is said to be to sniff and say “it smells clean enough to me.” This explains why our John Prescott (and others) were so anxious to reach a conclusion at the recent environmental summit on industrial emissions, before Bill Clinton bows out of the White House.

The prospects for the US managing a soft landing for the economy under the new, low-brow administration are remote. So much depends on that retail-investor confidence being carefully managed. A president who has no clear idea that there is a rest of the world, let alone what world markets consist of, does not bode well for the pace and depth of a forthcoming recession.

Still, it’s not all bad news. The euro next year will be a gainer from the dollar’s fall, which will assist business as it struggles in the new Europe. Telecommunications companies will grow up, as the best managed – such as Nokia – distinguish between killer applications for mobile phones (multi-media messaging and location-based services) and the silly and impractical (general access to the Internet).

Similarly, second-generation dot-coms will come through – real businesses operating in a tough economic climate that use the Internet as a low-margin route to market, rather than an over-invested fashion statement. So there will be things to be happy about too.

As to the Chancellor question, Labour will be returned with a reduced majority, Brown will have to carry the can for a collapsing economy and Mandelson’s mortgage is too recent a memory. The regrettable answer is Cook. On that note, I wish you a merry Christmas and as prosperous a 2001 as you can manage.

George Pitcher is a partner of issue management consultancy Luther Pendragon

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