Stuck in a Westminster time warp

Why is it that whenever statistics are published on foreign direct investment the political class queue up to demonstrate their lack of basic economic and commercial knowledge?

Oliver Letwin - the shadow chancellor, no less - was first to his feet this week after news that corporate inflows into Britain (inward investment) fell to £12.4bn in 2003, down from £16bn a year earlier.

"This dramatic and persistent decline in foreign investment shows companies are finding Britain an increasingly less attractive place to invest their money," Mr Letwin declared.

"This is hardly surprising when the economy is being suffocated by extra taxes and 15 new working regulations a day. Businessmen the world over are turning their backs on Tony Blair's Britain."

No they are not. The decline in foreign investment overwhelmingly reflects the decline in cross-border merger and acquisition activity since the bubble burst in 2000.

Mr Letwin, like so many others stuck in a Westminster time warp, persists in associating foreign investment with Japanese electronics firms building plants over here to employ ex-miners.

But in a world where capital flows and corporate ownership is increasingly deregulated, it is the buying or selling of whole companies which gives these inward and outward investment figures a trend.

So, when France Telecom bought Orange from Vodafone in 2000, the foreign investment stats for Britain that year jumped by £30bn. That deal fol lowed Vodafone's purchase of Mannesmann, which saw Britain's figures for outward investment zoom by £125bn that year. Germany's inward investment figures rose by the same margin.

So what Mr Letwin is really saying now is that he would like to see more British companies being bought up by foreign rivals - like Spain's Santander's recent takeover of Abbey National, which will inflate 2004's foreign investment figures by £9bn. That seems a very unusual political stance to take.

It's not only the Tories who get confused on this subject.

In countering Mr Letwin's jibes, chief treasury secretary Paul Boateng declared: "Instead of talking down our economy, Oliver Letwin should recognise that the UK maintains the highest stock of foreign direct investment as a proportion of gross domestic product of any G7 country ..."

That is like saying that while the French have been free to hoover up half of our utilities sector, British companies have not been able to invest across the channel.

What he might have pointed out is that UK companies had some £692bn invested abroad at the end of 2003, up by £76bn during the year. Crucially, the earnings of UK companies operating abroad rose 8% to £55.1bn during the period.

Yet Mr Boateng also seems to believe that we lead Europe in the foreign investment stakes.

That is patently wrong. Just a glance at the league tables would show him that this honour goes to Luxembourg, thanks to its secrecy laws and status as a tax shelter.

Very interesting


All of a sudden, inflation is back on the agenda and the apparent City consensus that interest rates have peaked at 4.75% is starting to look a little shaky.

Yesterday's figures on the labour market showed it defying expectations again. Employment rose to a record high, while unemployment on both usual measures fell back.

That is great for the people getting the new jobs - and doubly impressive when so much of the focus has been on jobs moving off-shore.

But there were accompanying signs that the tightness of the labour market, with unemployment close to its lowest for decades, could finally be pushing up wage inflation.

Headline earnings growth has been inflated by hefty City bonuses, but even when these are stripped out, the underlying pace of earnings growth has picked up to its highest since March 2002. The Bank of England's pain threshold on this measure is said to be 4.5% - so, at 4.4%, we are just a whisker away.

It is also worth mentioning that earlier in the week inflation measured by the old RPI, the rate favoured by wage bargainers, hit a five-year high at 3.4% - just as the New Year pay round is about to kick off.

For some time now, rate setters at the Bank of England have puzzled over the fact that earnings growth has remained so low, for so long - in spite of record low unemployment.

That said, the Bank's monetary policy committee is not prone to panic reactions; it looks at more sets of data in a month than might be healthy for most people.

The MPC will be mindful, for example, that most pundits (with the notable exception of the Chancellor of the Exchequer Gordon Brown) expect the economy to slow quite sharply next year, especially if the housing market continues to weaken.

The consequence could well result in a rise in unemployment and, in turn, give pay bargainers more than a pause for thought.