Outlook: Retail slowdown makes the case for more interest rate cuts

3G success; The Royal Mail Â

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Sales slip at Next rings alarm bells for retailers

Investment Column

Outlook

Is it just the weather, or something more serious? Britain's third-largest clothes retailer, Next, yesterday reported that like-for-like sales in the period from 11 August to 2 October were down 3.1 per cent. As far as we know, there is nothing structurally wrong with Next, so it is only reasonable to assume that its performance is typical. Another set of stunning results from New Look runs counter to that view, but New Look seems to have been more the exception than the rule.

All the anecdotal evidence points to September being a poor month for nearly all clothes retailers, and perhaps for retailing as a whole. The CBI distributive trades survey for last month pointed to a slight pick up on the high street, but coming after an appalling August, it wasn't much of a cause for celebration.

Now stuffed to the gunnels with clothing for the winter season, many retailers seem to have been badly caught out by the Indian summer. It is always hard to know exactly why retailers get constantly wrong footed in this way, since September is often warm, but no doubt the mild weather was a factor. If it is sunny, people are less prone to go shopping than if it wet and windy. Strangely, retailers will often use wet and windy weather as an excuse for poor performance too, but that's another story.

The main point is that there may be a more generalised slowdown on the high street going on. People seem to have returned from their holidays feeling that little bit poorer. Unemployment is still incredibly low given the scale of the business downturn and the house price boom continues unabated. But look to the dire state of the stock market, growing job insecurity, the tax rises to come, and there's no lack of reasons for belt tightening.

All of which is going to create another headache for the Monetary Policy Committee when it meets to decide on interest rates next week. By then we will have had a trading update from Marks & Spencer, the market leader in clothes retailing. If the figures confirm the trend, then the MPC must cut.

The mature thing to do may be to wait until the new economic forecasts are published in the pre-Budget report, but in truth nothing is gained by delay. Strong consumer spending has been about the only thing holding the economy up in the face of perilous conditions in the world economy, and if that's about to head south as well, then we really are in trouble. Conditions in the private sector are much more serious than generally appreciated. Business leaders don't always get it right, but when they are as gloomy as they are now, their mood tends to become self-fulfiling by infecting investment and employment decisions.

In the City the "D" word remains on everyone's lips. Few really believe a fully fledged deflation will take hold, but it is none the less what the stock market is beginning to signal. The gap between the yield on equities and bonds is as close to zero as it's been since the late 1950s, when the cult of equity was born. In a deflation, the old, inter-war relationship between gilts and equities would re- establish itself. Securities that guarantee repayment of capital and a small income on top would become inherently more attractive than equities. In a deflation profits become impossible to defend, dividends are cut, and companies go bust.

Price deflation is already a reality in manufacturing and on the high street. Only in services does the relentless, upwards march in prices persist. Central bankers in the US, Britain and even sclerotic old Europe would do anything to stop a generalised deflation. They should act now before it is too late. By cutting interest rates immediately, the MPC risks giving a further boost to the already overheated housing market. Few other reasons for caution exist. Inflation outside services is as dead as a dodo. There used to be an old lament that would be regularly flung at the MPC; "Give growth a chance". Today the challenge is to stop it dying altogether.

3G success?

In a speech yesterday on how economic ideas influence public policy (please don't stop reading), John Vickers, director-general of the Office of Fair Trading, cited the UK auction for third-generation mobile phone spectrum as a "highly successful" example of competition economics in action. Excuse me, but successful for whom?

Well, the Government got £22.5bn, or about 2.5 per cent of GDP, which in a rare flush of good sense was used to pay down the national debt. But it certainly wasn't successful for the bidders, who continue to labour under the weight of the enormous debts they took on during the mad scramble for bandwidth. Nor can the auction be regarded as a success in the wider public interest, as implied by Mr Vickers.

The 3G auctions were in fact little more than a giant con trick perpetrated by governments on the wider population. When The Independent predicted that proceeds from the auction might reach £5bn we were criticised by some analysts for exaggeration. What the City had not generally appreciated is how cleverly the auction's ground rules had been devised, using, as Mr Vickers points out, the theory of games with asymmetric information, so as to maximise proceeds to HMG. Because no incumbent could afford not to have a 3G licence, they all had to pay whatever it took and ended up, in effect, bidding against themselves to get one.

Well done the Government, perhaps, but the government is not the same thing as the public interest. The auctions resulted in a massive transfer of money from the private to the public sector and by so doing set back prospects for 3G services by years. Once they'd paid for their licences, the mobile operators found they didn't have anything left to invest in the networks. Europe now lags in a technology where it once led the world. The mobile auctions came to mark the top of the telecoms bubble, and its greatest act of profligacy.

The alternative would have been a beauty parade. Ministers took the view that it was irresponsible to give away such a potentially valuable public property. It would have amounted to a gift which could be sold on in the aftermarket for a fortune by those lucky enough to win the parade. Unfortunately, the effect of making the private sector overpay has been to render the spectrum worthless to all. The moral is that competition economics is fine in theory, but when applied by Governments to their own ends it becomes little short of disastrous.

The Royal Mail

Allan Leighton used to be one of the most talented chief executives in the land, but joining the Royal Mail seems to have turned his head. "Regulatory gobbledegook", he thundered over the regulator's entirely reasonable attempt to bring Mr Leighton's miscreant organisation to heel. There was honey in the headlines but a sting in the detail, he went on, warming to his own hyperbole. Had he described the measures as "the biggest smash and grab raid in history", as British Gas once famously did in similar circumstances, he could scarcely have been more over the top.

It can't be much fun attempting to manage all those grumpy posties, but Mr Leighton shows worrying signs of having already gone native. All the history of utility price regulation demonstrates that despite the howls of protest that greet every review, the regulator has invariably hugely underestimated the organisation's scope for cost cutting and efficiency gain. The Post Office has never been subjected to proper competition. It is a bloated, badly managed organisation and a last bastion of unjustified union militancy in a fast changing world. It deserves and needs the kicking it is getting.

There is one key difference between the Royal Mail and other price regulated utilities. The Post Office is still in the public sector, which means that if Mr Leighton is right, and yesterday's measures leave the company £500m a year worse off, it is the taxpayer who will pick up the tab. That makes Mr Leighton?s appeal to the Competition Commission less of a foregone conclusion than it might have been.

jeremy.warner@independent.co.uk