Economic prospects look fit to burst for corporate Britain

Politicians may wring their hands and industrialists may organise lobby groups for the euro, but there was no surer sign of an increasingly integrated European Union than the desertion of the UK during August. Like France and Italy, the UK is, refreshingly, now closed for the month. It used to be called the silly season – now it should be called the closed season. This will lead to a degree of apprehension among the commercial classes. Will a return to the desks of corporate UK reveal all as we left it, with economic prospects for the autumn looking sprightly and prosperous, or will a harsh reality have finally settled in? If the bubble doesn’t burst, can we at least anticipate a degree of deflation? It is difficult to recall that a year ago we were anticipating an economic recession equal in depth to that of the early Nineties. The first half of 1999 was predicted to be a period of contraction. The party was going to be over. In the event, growth rates were stable, interest rates have remained low and equity markets, apart from a couple of scares, have resolutely maintained levels that have defied the prophets of doom. It’s all too good to be true. Markets must have been driven by Internet and information technology hubris, mustn’t they? The economic correction has just been postponed, not cancelled, hasn’t it? Surely the millennium will be accompanied by corporate wailing and gnashing of teeth. Apparently not. As we venture tremulously towards the last quarter of the last year of the century, it would appear that our fears were unfounded. The UK economy is in good nick after all, and consumer demand is riding high on the back of an elusive feel-good factor that has returned to spending patterns. The Confederation of British Industry (CBI) is not always the most reliable witness, as it often appears to be driven by a desire to abolish interest rates altogether, or at least to ensure that the Bank of England’s monetary policy committee isn’t tempted to tick them up to avoid overheating in the economy. But its poll of manufacturing industry confidence, published last week, would seem to suggest that a mild upturn in interest rates during the autumn – in the manner of the US Federal Reserves recent cautious policy – would not be remiss. The CBI now expects the UK’s gross domestic product (GDP) to grow by 1.2 per cent this year and by nearly twice as much again next year (growth across the euro-zone is even better, with a weak euro and booming world trade providing a potent combination). Naturally, it adds that the strength of sterling is a continuing burden for exporters, that a further cut in interest rates would assist them and that to apply the brakes just as the economy is getting moving would be a disaster. To send that message to the arbiters of interest rates is the CBI’s job. But you can’t argue with the underlying figures. Recall how many of us mocked the Chancellor Gordon Brown when he anticipated growth in the order of one per cent to 1.5 per cent this year. He has been lucky and has made his own luck – it was a brassy forecast, but has made him look shrewd and statesmanlike. His vindication serves UK business well as the millennium approaches. I expect that if interest rates are raised to protect against overheating in the short term, the trend over the next couple of years will be downward. The monetary policy committee may be independent of government, but there will be a common interest in depressed interest rates to match the euro-zone if the UK were to be in the next wave of monetary union in 2001. The resultant confidence to which the CBI refers is palpable. Its symptoms are already presenting in the form of renewed corporate activity. I have suggested that corporate UK closes down in August, but that hasn’t stop the kind of takeover bid activity that one associates with a booming economy. The drinks sector, with its associations with celebrating punters, is a sound guide under these circumstances. The day after the Glorious Twelfth, Highland Distillers, the brand-owner of The Famous Grouse, attracted an offer from its largest charitable-trust shareholder. And Scottish & Newcastle, the UK’s largest brewer, announced last week that beer sales volumes are up on last year and that its retail business was ahead by 7.4 per cent in the first quarter. Elsewhere, the contested battle for Allied Carpets, variously valuing it at between &£72m and &£77m, with venture capitalist Wassall competing with French retail giant Tapis Saint-Maclou for ownership, is a sign of autumn takeover activity to come in the retail sector. There has to be a fly in the ointment and a report from US investment bank Salomon Smith Barney says that European IT spending, a major economic driver of recent markets, will stall next year. But that’s an exception that proves the rule. We were right to be wary of undue optimism during the nervous months of the first half of this year, but we can look forward to a season of mellow fruitfulness in corporate UK.


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