Time to lock in the gains

THE beast of inflation may have been beaten and growth may be the strongest among the richest nations, but Britain's economic problems are far from over.

The International Monetary Fund's annual inspection of Britain pinpoints several problems. The 2% to 2.5% growth rate for 2002 in the Pre-Budget Report (PRB) may turn out to be too optimistic because of 'uncertainty' surrounding the figures.

The IMF has concerns about the trends in public spending noting that the PRB fails to cost certain measures, does not include any accounting for the 2002 spending review and does not deal with the government's plans to raise health spending to the level of our European counterparts.

To ensure prudence remains Gordon Brown's middle name, the IMF suggests that Brown toughen up his fiscal targets. Instead of holding the national debt target at 40% of total output, he might consider lowering it towards the current 31%, locking in some of the gains achieved. Certainly, the IMF does not like the idea - floated in the PRB speech - that additional health spending be paid for by higher taxes. This, it says, would damage the 'neutrality' of Britain's tax system.

It also fears that a splurge on public services would lead to significant waste. Its preference for raising money is 'user charges' in other words following the French example of charging for a visit to the doctor. If taxes do have to be raised, this should be done by broadening the tax base.

In its press release, the Treasury emphasises the positive, notably the IMF's praise for the policy framework. There is a good deal for Brown to be proud of. Underlying inflation is down to 1.8% and the headline rate of 0.9%, a 38-year low, reflects well on the independence of the Bank of England and Brown's fiscal restraint.

It also leaves the UK with the flexibility to continue lowering interest rates if necessary to deal with threats to growth. Stability should not be risked on old Labour tax and spend.

Fed gloom

ALL those who thought that the Federal Reserve's run of interest rate cuts would end this month look as if they may be wrong. Last night's quarter-point cut to 1.75%, the 11th this year, brings the cost of funds throughout the US economy to the lowest level in decades.

With consumer prices still rising by more than 2%, it also means that the US now has negative real interest rates.

The sting in the Fed statement is in the tail. Despite recent stock market optimism, chairman Alan Greenspan clearly believes that the economy is not yet out of the recessionary woods. Conditions point to weakness for 'the foreseeable future'. Unless there is a dramatic improvement, markets will spend the holiday season looking to a further cut early next year.

Japan opens its doors

BY the standards of most overseas bids, the Compass takeover of Seiyo, the Japanese caterer, barely measures on the Richter scale. Nor does it give Compass any more than a foothold in the enormous Japanese food service market.

What is fascinating is that it is taking place at all. Not so long ago, Japan was closed to overseas takeovers. But the nation's decade-long economic and financial difficulties are starting to change that culture. Foreign presence is growing dramatically from $3bn (£2.1bn) in 1995 to $26bn (£18.3bn) in 2000.

Britain is at the forefront of this revolution, with Vodafone becoming a leader in the cellular phone market through its £6bn purchase of J-Phone.

A softer yen, weaker stock markets and the realisation that overseas management has something to teach corporate Japan have improved the climate for inward investment. Barriers which prevented the entry of foreign law firms are being lifted.

Among those making progress or looking hard at the Japanese market are the Prudential, Direct Line and Cable & Wireless. HSBC has an active investment banking operation in Tokyo and has been involved in several flotations.

If Japan's government ever gets to grips with cleaning up the banking system, HSBC would no doubt be a potential buyer of banking assets.

Compass intends to use Seiyo as a vehicle for picking up more businesses in the Japanese market and has sensibly decided to let the firm's current leadership have its chance, rather than parachute in foreign management without local knowledge.

As Boots and others have found, Japan can be a hostile environment. But there may be real opportunities for interlopers willing to shake up the existing structures.