OUTLOOK: Tough decisions ahead but a better class of deficit

If Kenneth Clarke and Eddie George had any doubts that 1995 was going to be a year of tough decisions, they must be be clear about it now. After last year's dream conditions of rapid growth and low inflation, and a year of essentially no-brainer economicdecision-making, the time for hard choices is now rapidly approaching.

January has opened with a series of disconcerting developments, some all too familiar, some by their nature unpredictable. On the international front, the Mexican devaluation and the Kobe earthquake have added two significant - but still unquantifiable

- uncertainties to the global economic equation. In the United States, the Federal Reserve is poised to raise interest rates next week as the economy there approaches the peak of the current business cycle.

Nearer home, the economic figures are still better than anything we saw in the bad old days, but there are ominous signs that some bad old habits may now be returning. First, we had the clear indications that inflationary pressures in the economy are building again. And now, with yesterday's startling trade figures, we have the first hint of that other old perennial, the worsening trade deficit.

It certainly casts a bit of a shadow over what you hope is a genuine export-led recovery if your exports suddenly start to stall. Britain's exports outside the European Union were still 4 per cent higher in December than a year earlier - but imports rose11 per cent in value over the same period.

Warnings about not reading too much into one month's figures are fair enough. We had some exceptionally good trade figures in the autumn. But the £1bn-plus December trade gap does raise the question of how robust the export miracle will turn out to be.

It is clear that there was something unusual about the early stages of the economic recovery. The balance of payments has been the Achilles' heel of the British economy for 50 years. Growth above a modest rate has always carried the seeds of its own destruction by sucking in imports. But, for 18 months, some brave souls have dared to hope that the import surge might be a thing of the past.

The fact that the US business cycle has run ahead of Britain's has helped sustain exports this time round. Consumer spending has also increased only modestly, and investment has been very weak - meaning less import growth than usual. It was so weak earlylast year that many economists, smelling a rat, started to query the statistics.

Although consumers are still cautious, there are hopes that companies are at last about to increase their investment spending . This could be one relatively unalarming explanation for the surge in imports last month. If true, the trade gap will widen further, as investment goods are even more likely than consumer goods to be imported.

Another reason not to worry excessively about yesterday's figures is that prospects for exports still seem good. The US economy will have another good year in 1995, and Europe is starting to recover. We can console ourselves therefore with this thought: that while Britain still has a trade deficit, it is probably a better class of deficit than in the bad old days. But that will not stop the financial markets from worrying about the tough choices that will lie ahead if the inflation-and-imports story continues to unfold the way it has this month.

Can Heseltine invent a better wheel?

If at first you don't succeed, try and try again. There is beginning to be something terribly familiar about Michael Heseltine's competitiveness campaign. The Mark Two version of his White Paper on the subject, updating last year's rambling first attempt, will be taking a detailed look at individual industries such as aerospace, pharmaceuticals, ceramics and even tableware.

Expected in the summer, it will reassess the Department of Trade and Industry's sponsorship role, evaluate each industry's strengths and weaknesses and produce detailed suggestions about how the latter can be put right. (Though Glaxo seems to have decided not to hang around and to rationalise the UK pharmaceutical industry itself.)

It is funny how fashions come and go. This new development sounds just what that much-maligned outfit Neddy - the National Economic Development Office - used to do before it was scrapped by the Government. Mr Heseltine is convinced he has reinvented a better wheel, and says his exercise is on a far bigger scale than the old Neddy. By hiring Walter Eltis, a former director-general of Neddy, as an adviser, Mr Heseltine seems to be cocking a snook at some of his immediate predecessors, who derided the value of competiveness studies.

"It is a culture, a process, an attitude," the President enthused yesterday about the work surrounding the Mark Two White Paper, before leaving for a trade mission to Japan. He says he detects a cultural change in industry's attitudes and in its improvedexport performance. "I put the claim no higher, but it coincides with our decision to set up a competitiveness unit and produce a competitiveness White Paper," he said.

With 14,000 copies of the first White Paper sold (at £15.40 a time) and a large number of workshops and other activities under way, he may well be right that companies are now focusing more intently on the issue of competitiveness. If so, it is no bad thing.

But while exports have shot up, there were signs - even before yesterday's trade figures - that Britain's recently acquired competitive edge in export markets is slipping again. And if you believe the common view in the City that we are poised for another takeover boom, more worrying still might be the fact that company bosses still prefer the quick fix of an acquisition to the hard slog of doing the simple things better.

Hot air over C&W deal The best bit of yesterday's deal between Veba and Cable & Wireless is that it confirms the UK's position as a favourite partner for Continental companies with highly regulated industries. Alone in Europe, we have the experience of living in deregulated markets, and this is becoming a marketable commodity in its own right.

Beyond that, much of the deal announced yesterday is, for the moment, hot air. The Veba stake in C&W is a cash transaction, for sure, but the two £2bn joint ventures in Europe the companies are plotting are nothing of the sort yet. They depend on many imponderables.

The first move, into the German telecommunications market, is more a hope than a promise. As deregulation proceeds and Deutsche Telekom is privatised, everybody - including BT with Viag - wants to be there. But C&W's estimates of the market share it can gain and the investment required need to be treated with great caution.

With all the uncertainties, even a powerful German partner is no guarantee of success in gaining licences and taking market share. C&W's inability to make serious money out of Mercury in the UK suggests it faces an uphill task to do better in Germany.

It may well be that the other joint venture with Veba, outside Germany, will be more fruitful. But both remain speculative. As far as the City is concerned, they do little to clear up the mystery of where Lord Young is taking C&W.