A WARM and friendly working relationship between the United States Federal Reserve and the Bank of England seems assured. The endorsement of Ben Bernanke’s appointment from the Bank’s Governor, Mervyn King, was wholehearted, from one academic economist to another. They had shared adjoining offices while visiting professors at MIT and appear to have remained on good terms.
Mr King’s enthusiasm for the nomination of Mr Bernanke as the successor to Alan Greenspan chimed with the general reaction and he seems unlikely to face any real opposition during Senate confirmation hearings. Yet, as Mr King also pointed out, it will not be easy to follow on from the legendary Greenspan. After 18 years in the job, Mr Greenspan has become the totem of sound monetary policy for the United States. The presence at the Fed of the craggy-faced veteran has given confidence to those who might otherwise have become deeply concerned about the dual deficits that the US Government has been running.
His has been a remarkable reign. His pronouncements have been so carefully couched that a determination to extract the full meaning from them has occasionally seemed to involve establishing the exact size of the pin-head on which he was dancing.
It would not be difficult for Mr Bernanke to be more straight-talking, but he will have to be careful not to spook markets, which have become used to interpreting Greenspanese. He will be arriving at the Fed when there are still some anxieties about the state of the US economy. Yet, despite the pessimists, who have long looked for a downward spiral, occasioned by a fall in the housing market hitting consumer spending, it is not happening. Despite the rises in interest rates, the market is proving resilient and consumers determined to spend.
Mr Bernanke is said to be something of a dove on interest rates, but economists last night were predicting that he might want to kerb that reputation by being somewhat hawkish in his early months in office. Unlike the Bank of England, whose Monetary Policy Committee is charged with the sole task of keeping inflation within the target range, the Fed has a wider remit. It must not only aim to keep inflation under control but also to target maximum economic growth.
Under Greenspan’s control, the Fed has succeeded in doing just that, to the benefit of the world economy. The phenomenal growth that has been enjoyed in China and India has in large part depended on a strong US economy. The Iraq war has presented the country with huge bills; hurricanes have done their worst, but still the US economy has marched on. We should all thank Mr Greenspan and wish Mr Bernanke every success.
Face the facts
THE Department of Trade and Industry has decided to look on the bright side. Reporting on Britain’s miserable overall investment in research and development, it chirpily points out that, if one ignored the companies that had most drastically cut back on their R&D spending, the picture would not look too bad at all.
It is undeniably true that, if one airbrushes out the blemishes from a photograph, the image is more attractive. But the picture is not an accurate reflection of the truth. And the truth is that Britain lags far behind its international competitors in its investment in R&D.
The report shows that R&D amounts to just 2 per cent of sales in the UK, against 4 per cent in Japan and 4.5 per cent in the United States. Even France and Germany are significantly ahead, investing, respectively, 2.6 per cent and 4.1 per cent of sales.
A lack of investment in R&D can only diminish the UK’s competitiveness. The Government may take comfort from the fact that, had the six worst- offending companies been left out of the equation, the country’s spending on R&D would have risen by 1.7 per cent. Those less inclined towards the Pollyanna approach may be concerned that the six include Reuters and BT.
Some UK companies are heavy investors, particularly those in the pharmaceutical industry. GlaxoSmithKline and AstraZeneca lead the UK league table, followed by BAE Systems, with Rolls-Royce also making it into the top ten. In pharma, as in defence, constant innovation is perceived as crucial for survival.
But in today’s global markets, innovation will be key to the future for any big business. Companies have been paying heed to investors’ demands for improved dividends and share buybacks, but they also need to make the case for long-term investment in the business.
Boots tie-up
PUTTING Boots together with Alliance UniChem makes perfect sense to Stefano Pessina, the architect of the deal, who would end up with a 15 per cent stake in the combined business. Other investors, however, have jitters, as the slithering share price demonstrates.
The most prevailing concern is that the competition authorities will want to take a very close look at the merger. There are also concerns about the management structure that would prevail. Signor Pessina’s title is executive deputy chairman and he insists that his role is developing strategy rather than implementing it. The Boots chief executive, Richard Baker, would in theory become chief executive of the enlarged group after the merger.
Yet Signor Pessina says that he will be in charge of integration, although he adds that this would be only the strategy of the integration. The smaller Boots pharmacies would come under the control of an Alliance executive and the larger stores would be run by a senior Boots employee, apparently leaving Mr Baker rather underemployed.
Yet while there are question marks over the deal, Signor Pessina’s enthusiasm has highlighted the possibilities that lie within Boots itself. He is convinced, for instance, that with his international distribution network he could take Boots products very successfully to a much bigger market. He believes that it has a strong and underexploited brand.
Should the competition authorities not be keen on the deal, investors might hope for a management that could make more of that name.
- AS WEATHER forecasters predict a freezing winter and fuel bills rise, Charlie Banks has sensibly decided that insulation is required. The chief executive of Wolseley, has paid 3i £140 million for Encon in a deal that catapults the building supplies group to second place in the UK insulation market. Helped by a series of logical add-on acquisitions, Mr Banks has delivered impressive growth since taking the helm in 200l. Wolseley shares have hugely outperformed the FTSE 100. Mr Banks retires next year, but prospects for his successor look well insulated.
