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Wednesday 23 January 2008

Why share price falls will put the brake on consumer spending

Why share price falls will put the brake on consumer spending

By Jeff Randall
Last Updated: 6:47am GMT 23/01/2008

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Yesterday morning, I nearly threw the radio out of the bathroom window. The cause of my temper tantrum was yet another air-head contributor claiming that what was going on in the City - sharply falling share prices - had nothing to do with life in the real world.
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It's a view that you might have expected from a 1970s social affairs lecturer, but not in post-Thatcherite Britain.


What happened on Monday, when the stock market fell by 5.5pc, its biggest one-day drop since the terror attacks of 9/11, will have a very immediate impact on ordinary consumers. Not just through a downturn in sentiment but via the pockets of millions who hold shares directly or in pension pots, tax-free Isas and other savings plans.

Earlier this week, I had a chat with Lucy Neville-Rolfe, a Tesco director, who told me that of the company's 300,000-plus UK employees, 179,000 own Tesco shares, most of which were accumulated through a save-as-you-earn scheme. These are not "free" options for senior managers, but small stakes in the company bought by supermarket staff who are not earning fortunes.

Tesco's shares have held up well compared with those of most of its retail rivals. Even so, the price has fallen by 15pc in recent weeks. By contrast, shares in Sainsbury's (with 60,000 employee investors) are down by nearly 40pc. At Marks & Spencer, 25,000 staff have seen their investments in the business fall by 45pc from last spring's peak. Where's St Michael when you need him?

Aside from retail, Britain's other main private-sector employer is financial services. At the big five banks, being a staff investor has proven less rewarding than dealing with an account manager in a Bangalore call centre. Many workers are nursing horrible losses on their employers' shares, which have fallen by 40pc-50pc. Money in the bank is not what it was.
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Add all this up, and you have yet another nasty turn of the screw on consumers' thumbs. Already feeling the pain of falling house prices, rising mortgage bills and higher utility payments, their hopes of easing the torture by cashing in profits from staff share schemes have been cruelly cut off.

This is not the parallel universe of venture capitalists, private-equity bosses, hedge-fund managers, investment bankers and futures traders. It is the unpleasant downside of being a bit-part player in a share-owning democracy.

It is true life - right here, right now - the upshot of which is that hundreds of millions, perhaps billions, of pounds of disposable income have vanished. In some cases, the cash has already been spent, exacerbating debt worries. Or, as a friend at Barclays (40,000 staff shareholders) told me:

"I have a keen appreciation of how much poorer I am than I was at this time last year."

For the Endowment Generation, those, like me, who were told by mortgage advisers in the mid-1980s that the best way to fund a new home was through an endowment policy, the stock market's wobble spells double trouble.

We are relying on rising share prices to pay back a 25-year debt, but it's not happening. When these schemes still had more than 10 years to run, stock market "corrections" were merely a notional destruction of wealth. But as the clock ticks down to pay day - mine has only 18 months left - red-faced insurance companies are sending out urgent warnings to many thousands of policy-holders, informing them that what has been built up in their accounts will fall well short of the amount required to clear the mortgage.

Given that between 1977 and 1999, stock markets enjoyed their greatest-ever bull run - 21 years of growth, with only two years of decline - many leading fund managers have performed miserably. They lost so much ground in the dark days after the World Trade Centre atrocities that even though share prices later recovered strongly, with four positive years between 2004 and 2007, millions of endowment policies are full of holes, made worse by Monday's nervous breakdown.

So please, whatever your view on the rights and wrongs of council-estate capitalism, let's have no more comments about anxiety over falling share prices being the preserve of a Square Mile squirearchy. You may loathe Tesco and all that it stands for, but its shares are probably underpinning your pension.

If that's the case, you enjoyed temporary relief yesterday after the US Federal Reserve cut interest rates by 0.75pc, the biggest reduction for more than 20 years. Tesco's shares jumped by 16p to 426½p, as London responded positively. For the market as a whole, however, it still looks like a long haul back to the FTSE 100's peak of 6,900 in December 1999. The index closed last night at 5740.

In America, where stock market indices have outperformed their British counterparts since the bursting of the dot.com bubble, not even the prospect of much cheaper money could lift the gloom. If anything, the Fed's move has dented confidence further because it had a whiff of desperation.

The world's pre-eminent central bank is supposed to be driving the car, steering it away from dead ends and holes in the ground. Instead, the Fed's chairman, Ben Bernanke, looks increasingly like a back-seat instructor, screaming conflicting messages as the vehicle lurches dangerously.

Just as prime minister John Major did in the dying days of the last Conservative government, Bernanke appears to be responding to headlines, making up monetary policy to fit the latest poll on consumer confidence or dip in share prices.

As a result, many on Wall Street are losing faith in the Fed's ability to avoid a crash.

The Bank of England, under Mervyn King, should not go down the same road. It would be completely inappropriate to start slashing interest rates here, where the threat of inflation is real. There is no premium in panic.

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