Sorrell plays a fine poker game, but is he serious?

Deficit in trade; Housing market

Sir Martin Sorrell, chief executive of WPP, is providing some much needed excitement to liven up the dog days of summer. But how serious is he in mounting his counterbid for Tempus Group, Chris Ingram's media buying company? Not nearly as serious as Havas, seems to be the answer.

WPP is already number two in the world behind Interpublic in media buying. Tempus would be a nice addition to its weaponry, putting it within spitting distance of Interpublic, but the acquisition wouldn't alter its position in the world rankings. By contrast, Havas would raise its position from the present number eight in the hierarchy to number six and it would gain some near dominant market positions in Europe. Strategically, Tempus is more important to Havas than it is to WPP, and it might therefore be prepared to pay more.

WPP already owns 22 per cent of Tempus, which it bought at much lower prices some time ago, and stands to profit handsomely if Havas comes out on top. At the 555p a share Sir Martin bid yesterday, the figures still just about stack up for WPP. The bid equates to 35-times this year's earnings, which would be pricey at any time but in a falling advertising market looks positively profligate. Blend in the lower prices WPP paid for its 22 per cent stake, however, and the multiple comes out at a more digestible 20 after taking account of estimated synergies and cost savings from the takeover of £13m. Sir Martin can afford to go higher, and still he wouldn't be seriously challenged for overpaying in the City.

Quite how much Havas is prepared to pay depends on which of its many spokesmen you care to believe, but again it's more than 555p a share. In any case, a speedy resolution to the impasse would seem to be in everyone's interests. Advertising, like all branches of the media, is an industry characterised by sometimes bitter personal rivalries. Tempus management want to go with Havas, not Sir Martin, and they have threatened to walk if the WPP boss wins. That plainly makes Tempus worth less to WPP. It's pure poker and a classic candidate for a Texan shootout finale, in which one party names a price at which he is either a buyer or a seller and the other player chooses what to do. But then that really would be expecting too much in the way of summer entertainment.

Deficit in trade

Time was when a trade deficit as large as the one announced yesterday would have prompted a sterling crisis and very probably a political crisis to go with it. Harold Wilson, a former leader of the Labour Party, even lost a general election over the trade figures, for they used to be regarded as the key indicator of how a country was doing – whether it is spending more than it is earning – and the markets would react accordingly. Not so today. Yesterday's figures caused barely a ripple, and that wasn't just because City analysts had largely discounted the further deterioration in the balance of trade.

Trade in goods and services is still obviously an important tool in assessing relative economic performance, but it is not the only one. As the United States has demonstrated, a big trade deficit doesn't necessarily matter as long as foreigners are prepared to keep financing it by buying dollar assets – or, in our case, sterling assets. While international confidence in a particular national economy is high, it can run as large a trade deficit as it likes and still prosper.

Of course, there comes a point if the trade deficit persists and the economy begins to look weak in other respects when the scales fall from everyone's eyes, and they take their capital elsewhere. There are already signs of this beginning to happen in the US. The mighty dollar is at last starting to weaken as the odds on outright recession shorten. Is the same fate about to befall sterling too? Well perhaps, but the idea that sterling needs to fall by quite a bit to bring us back into economic equilibrium with the rest of the world may be misplaced.

The trade figures tell a now familiar story. Our balance of trade in services is continuing to improve. It is only in physical goods that we have a problem and even here a sense of perspective is required. With the rest of Europe, we are still in surplus, and were it not for the distorting effects of some big aircraft orders, our balance of trade with the US would look reasonable too. It is with the rest of the world where the difficulty lies. Resilient consumer spending is sucking in cheap imports from the Far East.

Even so, it is worth remembering amid all the gloom and doom being reported in the corporate sector that this year Britain promises to have the strongest rate of growth of any of the big developed economies. At around 2.5 per cent, this may not be much to boast about, but the truth of the matter is that the position is not yet as bad in Britain as it is elsewhere and with luck, this relative resilience will persist.

Continued buoyancy in the public finances, also confirmed yesterday, is underwriting the Government's ambitious spending plans, which in themselves may help Britain avoid the worst effects of the downturn. In Germany, meanwhile, the prospect of recession is already causing policymakers to consider rewriting the stability pact rules on what size of budget deficit is allowed. Sentiment can change with frightening speed, but for the time being, the markets are probably right to ignore Britain's ever widening trade gap.

Housing market

Ever since the Russian debt crisis in the Autumn of 1998, predictions have abounded of an end to the house price boom. Yet if you had sold then and banked the cash, you'd have subsequently missed out on anything up to 50 per cent of additional upside, depending on where you live. Now again the predictions are raining in.

The Council of Mortgage Lenders yesterday added itself to a growing list of those predicting that house price inflation will end next year if not this. The CML often gets it wrong. Only last April, the mortgage lenders were predicting only 5 per cent growth in house prices this year. Now they been forced to admit it will be higher than 10 per cent. Yet with the economy slowing and job insecurity rising fast, it looks as if the jeremiahs of the housing market may finally be proved right.

For evidence of what's really happening in the housing market, look no further than the "Country Life" indicator, a favourite in the City. This is where "posh", top end of the market country houses are typically advertised, and right now the magazine is thick with them. Rather than being an indicator of continued buoyancy in the market, the thickness of the magazine should be read the other way round as first evidence of distress selling and a concerted attempt to cash in at the top of the market.

There are plenty of reasons for believing that this time round the damage won't be nearly as bad as in the early 1990s, when prices in some areas fell 30 per cent, many of them never to recover. The present low interest rate environment, combined with a more competitive mortgage market, makes housing more affordable than it used to be, which will provide some protection for prices during the downturn this time round.

Unfortunately, the flip side of the low interest rate coin is that there is limited inflation to deflate the value of the mortgage loan, while lower rates of return all round make it that much more expensive to pay back the loan too. Affordability may be a bit of a red herring.

j.warner@independent.co.uk