This is revolution - that's why we feel morosite

People will remain uncertain about the economy while traditional jobs are being lost, despite new opportunities

Sooner or later we will have to stop bemoaning the absence of the feel-good factor in economic life, those animal spirits that gave consumers the confidence to spend and spend and which stimulated companies into break-neck takeover programmes during the late Sixties, the Seventies and the Eighties. All that has gone for the foreseeable future. Inflation is over, deflation rules - and with it comes caution and job insecurity.

Conservative politicians delude themselves in thinking that because the unemployment trend has been declining for more than three years, and last week's figures were "good", people are soon going to "feel" better. Maybe. But note how economists refer to these statistics nowadays: they call the series "claimant" unemployment. This tells us there is something funny going on. If only those "claiming" unemployment benefit are counted, who is being left out?

Young school-leavers, 16-and 17-year-olds, are being omitted. They are supposed to be on youth training programmes, but many are not or drop out quickly. By and large these young people are ineligible for unemployment benefit and so disappear from the statistics. Another uncounted group of unemployed people are what are described as the "economically inactive". Typical of this group are those who have gone into early retirement following redundancy. About 17 per cent of all men who become unemployed drop out of the workforce for good.

In other words, the national statistics for unemployment ignore two unfortunate categories: youngsters without skills, and middle-aged people "let go" from companies to which they may have given half a lifetime's service.

Governments naturally think that they can control events. But the slow, crucial changes in economic conditions are like movements in the earth's crust. They are the result of powerful forces operating under the surface. They are international rather than national. In fact, what the French call morosite is rather more intense on the Continent that it is in the UK.

The most pervasive of these trends is deflation. Absence of inflation means that businesses cannot bail themselves out of trouble by raising their prices. Punishment in the market place for letting prices drift above the competition's is swift and brutal. A few days ago in France, for instance, Renault announced its first deficit for 10 years. Management accepted that it had lost sales and market share because Renault cars were too expensive. Manufacturing costs must now be cut by a further 8 per cent per vehicle. This means that Renault's labour force must shrink even faster. This in turn puts Rover here on notice that cost control has to become almost a fetish.

In this way, deflation becomes just as much a reinforcing mechanism as inflation was for many years. In Britain, annual rises in average prices are running at just below 3 per cent. There are no signs of inflation in the US or Japan. In France, consumer prices have actually fallen for three consecutive months. Everybody, everywhere in the world, has become price and cost conscious. In a deflationary era, one may feel virtuous but not carefree.

A second shift is that business thinking has turned against sheer size. This is the significance of the news that British Airways is considering whether to concentrate solely on the core jobs of dealing with customers and flying the aircraft. It would buy in all the other important but essentially peripheral services, such as aircraft maintenance, which it currently provides for itself. The BBC is considering similar plans to strip itself down to the very essence of broadcasting.

The purpose of such measures is to increase management's focus and to eliminate tasks that are now thought to be irrelevant. In addition, using contractors rather than a company's own staff is a way of giving greater play to market place disciplines. And so we have seen the dismantling of the huge industrial groups that were built up in the Sixties, Seventies and Eighties. Giants such as ICI and Courtaulds have divided themselves into separately owned units. The go-go conglomerates of yesteryear, such as Lord Hanson's group, have voluntarily broken themselves up into their constituent companies. In the US, the giant telephone company AT&T has announced similarly far-reaching plans. The results of all these various initiatives are the same: fewer jobs and more intense downward pressure on prices.

A third sea change is that the Nineties are turning out to be the central years of an industrial revolution quite as sweeping and transforming as the coming of the steam engine, or electric power or the internal combustion engine. The linking of computers all over the world to create the Internet is like the first railway age. It changes everything.

The first business casualties are likely to occur in traditional retailing. For instance, the biggest single bookselling operation in the US is now to be found in cyberspace at a Web site rather than in a main street store. And this at a time when only about 5 per cent of households are connected to the Internet. When penetration has doubled, tripled or quadrupled, retailing will look very different. Many traditional jobs will be lost while new opportunities are being created. This process also imparts uncertainty. It's never comfortable living through a revolution. Few people "feel good" while it is going on.