Perilous times as Greenspan prepares to cut again

More profit warnings (Cap Gemini and Merrill Lynch), more gloom (the FTSE 100 is once more testing its low for the year), and the main bulk of the Wall Street second-quarter reporting season hasn't even begun yet. That gets under way properly in the second week of July, and if there are any pleasant surprises to be had from it at all, then they are being kept well under wraps. Much more likely is a whole new wave of warnings, and furthermore, that there will be clear signs of the deep recession we are already seeing in the New Economy spreading to Old Economy companies too.

At City lunch tables, where only a month ago the belief was widely expressed that the US, Britain and the rest of the world would escape a full blown recession, the mood is increasingly pessimistic, and it's no better among business leaders either. So far, the business downturn has been largely confined to technology, telecoms and the media. Robust consumer spending, both in the US and the UK, has kept other industries motoring. But in the US in particular, that's beginning to change and it may be starting to happen here as well.

Right across the board, discretionary investment and marketing spending is being sharply cut. Yesterday's Cap Gemini warning served as a sharp reminder that in the current environment, all IT spending is dispensable. All over the place, there is the sight and sound of companies battening down the hatches, reining in budgets and taking the axe to headcount. Whether this process will lead to all embracing economic contraction is still open to question, but one thing is certain. The swift recovery in confidence and activity generally anticipated at the start of this year just isn't happening. A more prolonged period of sluggish, or even negative growth is in prospect.

The severity of it would seem to depend largely on Wall Street, and again the outlook here doesn't look encouraging. The most remarkable thing about Wall Street, and indeed the London and European markets too over the past year, is just how resilient they've been to the technology slump. This is largely accounted for by a sharp bounce back in Old Economy share prices, many of which are now trading close to or at their all-time highs.

If what we are about to see is a sharp fall in corporate earnings across the board, few of these valuations will look justified, and the really frightening thing is that if the S&P 500 slumps back to what might seem a more reasonable level, then the damage through the wealth effect to US consumer spending will make what's already happened to Nasdaq look like a vicar's tea party. It would be like a self-fulfilling prophecy. The multiple on the S&P 500 might continue to look fanciful even with the index at 800 (at present it is still above 1,200) if earnings take a severe battering.

This is, of course, the nightmare scenario, and it is the one that Alan Greenspan is working hard with repeated US interest rate cuts to prevent. We are likely to see another sharp cut again tonight and it's easy to see why. At the sharp end, where the contracts are being signed and the deals are being done, there's a precipitous decline in business going on. In the past month, the chances of recession have shortened greatly. More worrying still, an ever worsening business downturn is coinciding with signs of resurgent inflation, which will severely limit the ability of policy makers to do anything about it. It's an ill wind, and it blows no good.

The Post Office has now got a financial meltdown to go with its silly new name. Consignia tried every which way yesterday to pretend it made a profit last year but no amount of accounting mumbo jumbo can hide a £3m operating loss on turnover of £8bn.

Quite how such a performance is possible when the Post Office still enjoys a monopoly over virtually all UK letter deliveries beggars belief. Yesterday the head posties John Roberts and Neville Bain were blaming everyone except themselves: wildcat strikers, trains which don't run on time, and customers who are not posting enough letters. But none of these things can even begin to explain how Consignia's operating costs mushroomed by £1bn last year when mail volumes grew by only 2.3 per cent and it actually had 547 fewer post office branches to worry about.

Consignia has been trying to make up the shortfall between income and costs by gouging its captive customers with a price rise but the industry regulator, PostComm, has understandably shown it the door. If Consignia had been investing heavily in service improvements, then the deterioration in finances might at least have been understandable. But in fact quality of service is deteriorating, not improving. Even on the Royal Mail's own figures, one in ten first class letters fails to arrive the next day. If you are unlucky enough to live in the blackspot of Southend-on-Sea, then the figure rises to three in ten for any letter that was not posted locally.

Consignia's answer to the deep-rooted problems in its core UK business is to wave the big stick at its militant unions and haggle with the Treasury over how small a dividend payment it can get away with this year.

Mr Roberts warns that without significant productivity improvements, there will be more job losses and more business grabbed by the competition. But Consignia's efficiency targets for this year will only deliver a £50m saving in costs, which looks like a drop in the ocean given the rate at which they have been galloping out of control. The regulator Graham Corbett is about to pronounce on the level of competition Consignia will face now that he has the power to licence rival operators to deliver the mail. The more the better, will be what most people think.

Claims Direct is one of those businesses which should never have been floated on the stock market in the first place, but that's no reason for shareholders to dash out and accept the bid that was tabled yesterday by their chairman and deputy chairman.

To describe it in time honoured form as "derisory" doesn't really begin to express the anger many investors will feel about an offer which values their company at a mere eighteenth of its market capitalisation at the time of flotation a year ago, and is only a third the amount this pair of ambulance chasers managed to realise in cash from the same IPO.

Generously, you might think, the bidders have agreed either to match or sell to any better offer that might come along, which means they cannot use their controlling 43 per cent stake to block out higher bids, but it hardly comes as much of a consolation. Since floating on the stock market, the company has been hit by a barrage of adverse press criticism, and it is still awaiting a ruling from the courts on how much of its costs it can charge to insurance companies for successfully fighting personal injury claims.

This pretty clearly makes a big difference both to the company's level of profitability, and to its level of business, since claimants are not going to take the company on if most of their settlement is eaten up by costs. Claims Direct is a mess and a scandal, and it's a wonder its two founders are still on the board at all, let alone that they've got the cheek to try to buy back the company at a fraction of the price they sold it for.

j.warner@independent.co.uk