Outlook: Retail gloom reverses the prognosis for interest rates

Amey axes Staples; Life assurance; Cable & Wireless Â

A month is a long time in economics. Mervyn King, deputy governor of the Bank of England, seemed to have it about right in the run up to Christmas in warning the next movement in interest rates was more likely to be up than down, but it is by no means clear that he or the rest of the Monetary Policy Committee would hold that view today. Yesterday's distributive trade survey from the CBI, confirming growing anecdotal evidence that retailers had a poor Christmas, is just the latest evidence of economic flu.

Annoyingly, the CBI survey only went up to 18 December, so we don't yet know to what extent there was a last minute rush, or whether buyers were simply holding off for the post Christmas sales. The Oxford Street "shopometer" – an admittedly crude measure of high street activity gaged by counting the number of times you have to sidestep other shoppers while walking down Oxford Street – strongly suggests that things didn't pick to any significant degree. Meanwhile, the purchasing managers index for last month shows that the manufacturing sector is once again contracting. There is also mounting evidence that the house price boom is as good as over.

If it is true that consumers are finally running out of puff, then that's pretty serious news for the economy as a whole, for there is no sign of business having regained sufficient confidence to take up the baton again and start sprinting with it.

All of which points to another interest rate cut, possibly quite soon into the new year. It won't happen at next week's meeting of the MPC. Mr King and others will want to see firmer evidence of a slowdown in the housing market first. The market is already as dead as a dodo at the higher end, but the price of cheaper properties, both within and outside London, are continuing to rise. Softness at the top end of the market is in part because of the already deep recession in the City, but eventually this loss of confidence in £800,000 plus range of properties will trickle down to more affordable parts of the market as well.

The immediate trigger for lower rates is likely to be war in Iraq. Already the oil price is rising strongly in anticipation of an outbreak of hostilities either later this month or early next. Monetary purist that he is, Mr King might think that higher oil prices demand higher, not lower, interest rates. But when push comes to shove, he'll be doing his bit for the war effort along with everyone else. The MPC needs to be standing by ready to bolster confidence.

Amey axes Staples

Brian Staples' pay-off from the Tube contractor Amey is not in the same league as the one he received from his previous employer, the north-west water and electricity supplier United Utilities. In that case he was run out of Manchester because he got on rather better with the chairman's secretary than the chairman.

His transgressions this time around are much worse, which helps explain why he is getting so much less in terms of a pay-off. At Amey, Mr Staples has presided over destruction of shareholder value on an heroic scale. Investors must have thought they had mistakenly invested in the bubble industry of technology, not construction, so dire has been the loss of value.

To most mortal folk, £287,000 sounds an awful lot. But as pay-offs go it pales into insignificance compared with the rewards for failure showered on other departing executives. Amey could have refused to pay Mr Staples a penny and offered to see him in court. But £287,000 would not have gone far when the lawyers' meter started running and, after all, a contract is a contract. At least Amey has managed to halve the amount Mr Staples is entitled to and insisted on it being paid in monthly installments, so that in the unlikely event of him doing a Gerald Corbett and getting back into gainful employment rapidly the payments cease.

Although large by most people's standards, the pay-off is probably modest enough by today's standards of executive fat cattery not to enrage the corporate governance police. Nevertheless, it emphasises once again that companies really ought to be paying more attention to the prospect of executive failure at the time they sign contracts, not when the wheels have begun to fall off.

Unlike his departure from United Utilities, it is hard to see how Mr Staples will bounce back from this one. As for Amey, it still faces a desperate struggle for survival. Hardly the most auspicious note on which to launch the part-privatisation of the Underground.

Life assurance

It is often said that life assurance isn't bought, it is sold. The Financial Services Authority wants to reverse that, so that savers at least know what they are buying when they are sold an endowment or pensions policy, even though many might still more profitably pay off their credit card bill than save through a with-profits fund.

It has taken a three year bear market fully to expose just what a rotten deal with-profits investment has been for many savers. Some life companies are better at disclosure than others, but in most cases it is still impossible to know what goes on underneath the bonnet of a life fund. Exit penalties make it all but impossible to withdraw, except at serious cost to capital, investment performance is obfuscated, management fees are difficult if not impossible to get at and, as the disaster of Equitable Life all too plainly demonstrates, you never quite know what calls there might be on the fund's reserves besides your own.

Perhaps worst of all, the product's main selling point – that it is capable of smoothing investment performance across the cycle – has turned out to be entirely hollow. The discretionary terminal bonus, which is where the bulk of the return is earned on most policies, has been repeatedly cut in recent years in response to deteriorating solvency. Often, these cuts take place without adequate explanation as to their causes or timing.

Ron Sandler, the former Lloyd's of London chief executive, has suggested a suite of simplified products as a way of saving the with-profits tradition for the nation. The FSA yesterday did its bit for the cause by publishing a consultation on how the burden of sell-side regulation might be reduced, so as to make low selling commissions possible. What neither has yet explained is how a "smoothed" investment product can exist at all in a world of full disclosure, where subsidising one lot of policyholders from the payments of another suddenly exposed to the full light of day. When it finally emerges, the new, government-approved suite of products is going to look much more like unit trusts, with mixed investment attributes, than traditional with-profits.

Cable & Wireless

Duncan Lewis, the former Mercury boss who has been linked with both the top jobs going at Cable & Wireless, pretty much closed the door on all such speculation yesterday by saying he's not interested in the chairman's role, and he'd have to think twice before accepting the chief executive's job too. Mr Lewis is just one of a growing band of British executive talent that much prefers the relative obscurity of private equity to the stress and transparency of running a publicly quoted company.

The rewards are much higher, and because they aren't publicly disclosed, less controversial. The shareholders, who ironically are exactly the same collection of pension fund and insurance companies that own the publicly quoted companies, are also more understanding and long termist. Why would anyone want to swop the privacy of venture capital for the goldfish bowl of the listed sector, asks Mr Lewis? It's a good question which the City would do well to heed in its search for top people to turn around some of our largest companies.

jeremy.warner@independent.co.uk