Silver lining from sterling

SIR Eddie George is right. Excessive gloom could be self-reinforcing and impact on confidence. But blaming the nation's economic difficulties on 'exaggeration and sensationalism' in the media is slightly far-fetched.

The government's business investment figures, just released, show just how deep-seated the current problems in manufacturing have become. Business investment fell 1.1% in the final quarter of last year, with capital expenditure down a whopping 18% year-on-year. It now has fallen below the valley of the last recession and is at its lowest point in 18 years.

As employers' group the CBI noted, the data is 'deeply worrying'. The CBI fears not enough investment will have been made for business to take advantage of recovery if, and when, it arrives.

On the other side of the Atlantic, shocking consumer confidence figures rocked the Dow Jones on its heels and did nothing to cure the jitters of the Footsie, already hurt by the Pru. The Conference Board's measure of American consumer confidence plummeted to 64 in February, down from 78.8 in January, and is now at its lowest point in a decade. Clearly, fear of war with Iraq is proving a potent force on both sides of the Atlantic.

Still, the Bank of England in its Commons testimony did its best to support manufacturing, and exports in particular, by talking down the pound, already well down as our chart - which measures sterling's value against a basket of currencies of our major trading partners - shows. Chief economist Charles Bean (a favourite to take over from Mervyn King as deputy governor) argued that a further devaluation may be required. 'Some exchange rate movement may be needed to correct the trade deficit in the future,' Bean remarked. He also pointed out that a worldwide recovery would help.

That does not seem on the cards given that the IMF trimmed its global growth forecast, and that for the British economy, at the Paris gathering of the Group of Seven richest countries.

The most reassuring comment from the Bank testimony came from George, who assured the Treasury select committee that the recent cut in interest rates to 3.75% was not a response to crisis. There was 'nothing hidden in the woodwork' George said. He also pronounced he was 'surprised that the market was surprised'.

If the market is puzzled by anything at present it must be why the Bank of England is no longer looking to a strong pound to keep inflation at bay. There is a clear belief that inflation has been slain to the point that the UK can live with a softer exchange rate.

Indeed, over the longer haul, a weaker pound may be helpful in rebalancing an economy where all the bounce has come from consumption rather than real wealth creation.

Insurance insightsTHE grim tidings from the insurance sector go on. Buried amid the generally good tidings from Halifax-Bank of Scotland, where profits were 25% up at £2.9bn, there were negatives stemming from insurance and pensions exposure. Clerical Medical has sucked £800m out of group reserves in the last 18 months, losses at St James's Place took care of another £72m and the group pension schemes threw up a £792m deficit.

Some of this, together with the increased provisions, took the shine off the integration benefits from the merger between Halifax and BoS which are now coming through strongly.

Most importantly, perhaps, for the future has been HBOS's ability to play in the big leagues, counting the financing of Philip Green - in his buyout of Arcadia - among its biggest transactions.

Meanwhile, over at the Prudential, the arrival of the cautious central banker David Clementi as chairman may well have been critical in the decision to put the dividend policy on hold - a jolt to the whole market.

The Pru is also taking a cautious view on surrenders, although you would hardly know it since this is buried in an appendix to the accounts under the inelegant title 'cost of strengthened persistency assumption' - a £47m hit to the 2002 accounts.

So much for a new age of transparency.