Outlook: Brown dons the face mask as economy falls victim to Sars--BT price cuts; Corus bail-out?
<a href=news.independent.co.uk>/news.independent.co.uk By Jeremy Warner 04 April 2003
Both literally and metaphorically, the world economy is being weighed low by an outbreak of severe acute respiratory syndrome (Sars). Our own small island, where the disease has yet to reach pandemic proportions, first. Manufacturing remains deep in the doldrums, construction is slowing, and now the once buoyant services sector seems to be shrinking too. Don't be fooled by yesterday's Nationwide survey, which showed continued strong growth in house prices, or Bank of England figures showing that equity withdrawal reached near record levels in the final quarter of last year.
The story told by these numbers is a backward looking one which saysvery little about what's happening to demand and confidence right now. The Bank of England tacitly acknowledged that a tipping point had been reached in the economy last February, when it unexpectedly cut interest rates. Things have deteriorated a lot further since, and were it not for rising public sector expenditure, I think we could be pretty sure that the economy as a whole would be in recession. Certainly the private sector is contracting right now.
It's unclear how much of the blame for this can be attributed to Iraq. The continued after effects of 11 September, the end of the investment bubble, and the subsequent 50 per cent collapse in equity values are equally potent factors. To these must now be added a fifth, Sars, which has already prompted a collapse in international air travel and the cancellation of conferences and events across the world. A pandemic was about the last thing the airlines needed on top of everything else, but they've got it.
Throughout large parts of Asia, the effect on economic activity is already devastating. Meanwhile, Europe continues to labour under the sickness of older diseases – a gradual hardening of the arteries for which it seems unprepared to take the cure. The European Central Bank could have cut interest rates yesterday, which may not have done a lot of good, but it couldn't have done much harm either. As usual, the decision was ducked. The best thing to do in current circumstances is to remain calm and confident, said the ECB president, Wim Duisenberg. Strangely, hardly anyone seems to agree with him.
As for the US, the declining dollar tells you all you need to know about what markets think of short to medium-term economic prospects in the land of the free.
That the Chancellor will cut his growth forecasts in next week's Budget is already certain. The question is by how much? Anything less than 1 percentage point for this year and next, reducing the range to 1.5 per cent to 2 per cent for this year and to 2 per cent to 2.5 per cent next, would be regarded as unrealistic. That leaves the Chancellor with a thumping great revenue shortfall to make good, either by taxing us more or by borrowing more from the capital markets.
In my view the economy is already at tax saturation point, in the sense that any further increase in the tax burden is likely to prove counter productive by stifling activity and spending and thereby reducing the overall tax take. Under Government plans, the tax burden is already due to rise from 36 per cent of GDP now to 38.6 per cent by 2007/8. It couldn't sensibly rise further without threatening the tax base as a whole.
We'll learn in less than a week whether the Chancellor shares that view.
In the meantime, there is but one ray of light amid all the gloom. The stock market is beginning to look through the fog of war to sunnier climes beyond. I'm more and more convinced the stock market has seen the bottom, even if the real economy, which tends to trail the markets by a year or more, has not. A serious setback in the war would sink that prediction, which is why caution remains the order of the day, but then only 3.5 per cent of those that develop Sars will die of it. Most of us will survive and, God willing, eventually prosper again.
BT price cuts
First British Telecom cuts the price of telephone calls. Now it's cutting the price of broadband. Well, that's if you count a £2 a month reduction in the wholesale price of ADSL as much of a cut. Rival broadband service providers say it's not worth a fig once you take into account that BT last week doubled the activation charge back to the old rate of £50, and you can see their point.
BT has based its whole growth strategy around the hunt for broadband customers and although it seems to be on target to meet its aim of 1 million ADSL connections by this summer, the marketing drive is plainly not delivering the planned for rise in top line revenue growth. As fast as volumes rise, BT is being forcing to cut prices, both in traditional voice telephony, where it faces increasingly intense competition from the new breed of carrier pre-select operators, and in broadband.
I've long believed that the best way forward for BT is to break itself up further by formally separating the telecom networks, which would sell their services entirely as a wholesale operation to other telcos, from its customer facing retail business.
The retail operation has already moved to exploit its customer base by offering other services and products besides telecommunications, but the fact that it is part of an integrated telco has hampered these efforts and prevented it from acting as aggressively and effectively in alternative utility markets as Centrica and others. Likewise, the wholesale operation is compromised in its broadband offering by the fact that the company's retail arm wants to keep as many new ADSL connections to itself as it can.
Ben Verwaayen, BT's chief executive, has committed himself to continued integration, but he must sometimes wonder whether a better break-up of BT than the one it undertook – the demerger of mmO2 – might have been to keep the mobile and retail interests together but demerge the wholesale operation. It's too late now. Or is it? mmO2, which surely offers better growth prospects than chasing broadband, could be bought for less than £5bn.
Corus bail-out?
How the mighty are fallen. In recent weeks, Sir Brian Moffat, chairman of Corus, the Anglo-Dutch steel maker, has been talking to both Lakshmi Mittal and Benjamin Steinbruch about possible combinations. The former is a less than transparent steel tycoon who nobody outside the industry had ever heard of until he donated money to the Labour Party. The latter is chairman of CSN, the Brazilian company Corus was last year trying to merge with.
The City hated the deal from the moment it was announced, largely because it couldn't stomach the idea of what Luiz Inacio Lula da Silva might do to the Brazilian economy once he became president. As it turns out, Lula seems more cuddly teddy bear than a workers' revolutionary, and if Mr Steinbruch could be prevailed upon to agree the same terms again, the City would bite his hand off to take them. Mr Steinbruch is not so stupid, and today, he would be the dominant partner in any merger, not Corus.
None the less, Sir Brian is right to be talking. The best that any new chief executive of Corus can look forward to is that of managed decline as things stand. If any value at all is to be salvaged from the wreckage of Europe's declining steel industry, Corus must find partners in the developing world, which one day, possibly quite soon will be producing all the world's steel requirements.
The Mittal approach to the remaining British and Dutch steel interests would undoubtedly be a hatchet job, reducing the company to a more specialist core. Sir Brian might reasonably conclude he could do that himself. CSN offers the more appealing route, but it may no longer be a bridge that's open.