Onshore winds give the MPC a nasty headache

Sir Edward George, Governor of the Bank of England, said in his Mansion House speech last month that the Monetary Policy Committee was sailing through conflicting offshore currents and variable onshore winds, but he remained on watch, ready to tack as conditions change. There was no tack from the MPC at the end of its two day interest rate meeting yesterday, and despite the howls of protest from British industry, it is easy to see why.

There is a big structural problem in the British economy right now and the MPC is pretty much powerless to do anything about it. While weak international demand and the even weaker euro weigh heavily on our manufacturers, domestic consumer demand is galloping away like there's no tomorrow.

Cheap and easy credit combined with low inflation and a tight labour market make the feel good factor that allowed Labour so comfortably to win the election grow stronger by the day, and if there are clouds on the horizon, nobody seems that bothered by them yet. Despite the slowdown in the US and now Europe, the Treasury sees no reason to revise its growth forecast for this year and next of 2.25 to 2.75 per cent.

And yet there are parts of the economy that are either in or close to recession. Engineering and other forms of manufacturing go without saying. The extraordinary collapse of New Economy industries – technology, media and telecommunications – has hugely broadened the range of these recessionary influences. Eventually, they are bound to affect consumer spending.

The 1,500 likely to lose their jobs with Marconi in the UK is just the tip of the iceberg. In nearly all branches of the TMT industries, there are either overt cutbacks going on or it is being done by stealth. Either way, companies are making do with fewer people and job insecurity is on the increase. As people become more insecure in their jobs, they will stop spending so much, stop house hunting with such aggression and belt tighten all round. And if that happens, then the MPC can start thinking seriously about easing industry's plight by cutting interest rates again, thereby weakening the currency.

The trouble is that it is not happening yet. The best of the cheap mortgage deals are beginning to dry up, which in time will ease the pressure in the housing market, and there plainly aren't as many well paid jobs around as there were. So there are signs of a change in the onshore winds, but for the time being they blow more strongly for a rise in interest rates than the fall our factories so desperately need.

Marconi fallout

Should Lord Simpson and his chief propagandist, John Mayo, be forced to walk the plank at Marconi after the fiasco of Wednesday night's profits warning? The case for the prosecution is an easy one to make. That they made a big strategic error in investing the former GEC's cash mountain at the top of the market in the then glamourous business of internet routers and other high tech communications equipment is pretty obvious.

That they were guilty of over-optimism, even as the market began to collapse beneath them, is obvious too. Nor is there any denying that they have been economical with the information flow as the New Economy dived into recession. While Cisco, Lucent, Nortel and others were all warning of a collapse in orders, Marconi either said absolutely nothing or it tried to pretend that for one reason or another things were not quite so bad at Marconi.

When finally Marconi came to admit to itself and the outside world that things were just as bad as everywhere else, it did so in a manner which only heightened the sense of theatre and hysteria that has surrounded this sector by ordering the shares to be suspended all day without a word of what was going on. Then there was the attempt to rebase executive and staff share options, justified by the need in a competitive labour market to keep top technical and executive talent. Far from needing to incentivise staff to stay, the company is now being forced to pay 4,000 of them to go.

And so on and on the charge sheet goes. Can there be any defence at all to such a damning indictment? Well, hindsight is a wonderful thing and it is easy to forget that little more than a year ago, both Lord Simpson and Mr Mayo were being warmly congratulated both in the City and the financial press for the transformation they had brought about at Marconi. Even now, after yesterday's horrendous collapse in the share price, the value destruction that has taken place under their watch is not as bad as it seems.

Don't forget that when GEC was morphed into the present Marconi, shareholders also got 37 per cent of BAeSystems in exchange for the defence electronics business. In addition, there was some cash and a bit of Alstom too. Add those sums back in and the numbers don't look so bad. What's more, Marconi's present range of interests are basically good businesses which unless the communications revolution fizzles out entirely, will eventually revive.

Even so, there's little doubt that the position is ugly indeed, and that someone is going to have to pay for it. In the end, that person is more likely to be Mr Mayo than Lord Simpson. This may seem hard, but chucking both of them overboard would only further destabilise the situation, making a bad crisis even worse. Lord Simpson was the architect of the strategy, but it is Mr Mayo who was its financier and chief cheer leader.

As Marconi began to derail, he has become increasingly odd, cantankerous and chippy. It was as if he was trying to prove everyone wrong, that he couldn't accept what was happening in the market place would have any effect on his treasured Marconi. Now that his optimism has so comprehensively been proved incorrect, no one is going to believe him when he says that things really aren't that bad, and that anyway they will start improving again next year.

Lord Simpson was due to step into the chairman's shoes at the annual general meeting on July 18, and Mr Mayo was going to become chief executive. Sir Roger Hurn, the present chairman, should be prevailed upon to stay on, Lord Simpson should be forced to remain in situ as chief executive until a suitable replacement emerges and Mr Mayo should be asked to fall on his sword. For shareholders, the best hope would seem a speeding of long overdue consolidation in this industry, but in the present environment, that may prove wishful thinking too.

ONdigital bravery

ONdigital IS reported to be exploring ways of phasing out free set top boxes. As by far the weakest player in a digital market of three, this is either a brave or stupid thing to be contemplating when the other two show no sign of doing the same. Both Sky and the cable companies would dearly love to stop subsidising new subscribers too, but they are not going to do so as long as the opportunity remains to hammer home their advantage over ONdigital. Charles Allen's gloriously embarrassing letter to the Prime Minister threatening to pull the plug on ONdigital if he is not allowed to merge Granada with Carlton rather gave the game away. It appears that all the other two have to do is wait long enough, and eventually ONdigital will fall into their laps.

j.warner@independent.co.uk