London: Warning given to Brown as Wall Street's prices crash

David Smith, Economics Editor

FINANCE ministers and central bank chiefs of the leading industrial countries met in Washington last night amid a stock market sell-off that economists warn could derail the world economy. The crisis comes amid renewed criticism from economists of Gordon Brown's budget.

The Group of Seven meeting, attended by the chancellor and Eddie George, the Bank of England governor, met in the wake of Friday's record one-day fall on Wall Street and a week-long rout of technology stocks that saw the Nasdaq index plunge by 25%. The share price slump wiped $2 trillion (#1,250 billion) off America's wealth in just a week.

Some economists believe Wall Street's fall could mark the beginning of the long-awaited downturn in the American economy. Dealers expect share prices in London to open sharply lower tomorrow morning. They also warn that the fall will have a knock-on effect for Britain.

"We're in for a bumpy ride," said Professor Doug McWilliams, head of the Centre for Economics and Business Research. "This substantially increases the risks of a hard landing in America."

Falling share prices have had a significant effect on wealth in Britain. At the time of the publication of The Sunday Times Rich List a month ago, high technology shares were soaring ahead and creating a new generation of internet millionaires. The wealth of Britain's richest 1,000 people stood at #160 billion, having risen by #15 billion since January.

Now, according to Philip Beresford who compiles the list, the rich have experienced a reversal. "On a rough calculation they have lost all the gains they made since January and it is likely that they will lose even more," he said yesterday. Some of the biggest losers are likely to be the young internet "millionaires" who have not yet had an opportunity to cash in on their wealth.

Other victims will be among the so-called "day traders", drawn into the stock market by the prospect of quick gains.

On one internet site for such investors yesterday, they were bemoaning their fate. "You can get savagely burnt," said one. "My shares just kept going up in a straight line and I was telling everyone how easy it was."

Particular criticism was being levelled at Lastminute.com, the internet company floated on the stock market last month, which is now trading at 60% below its offer price.

America's share price slump was sparked off by figures showing that inflation was worse than expected. Although the 618 point drop in the Dow Jones industrial average was the largest on record in terms of points, its percentage fall, 5.6%, was smaller than on Black Monday in October 1987 which saw a 22.8% fall.

In Britain the inflation dangers are seen to be less acute, but last month's budget has added to the risks. Brown's attendance at the Washington meetings of the International Monetary Fund and World Bank - where demonstrators have threatened huge, Seattle-style disruption today - has been marred by IMF criticism of his budget as "regrettably procyclical". Others agree.

Oxford Economic Forecasting, which produces its forecasts in conjunction with the London Business School, will warn in a report tomorrow that Brown's budget has added to the problems for the economy.

"The increases in public spending have intensified the pressure on sterling and hence on manufacturers," it will say.

"Interest rates therefore look set to have to rise again soon, with our forecast showing a peak of 7% in the autumn."

The Oxford forecast will also warn that taxes might have to go up after the general election to pay for the boost in spending. The respected National Institute of Economic and Social Research, which will publish its new quarterly forecast for the economy on Thursday, will also back the IMF's criticism.

"The budget was expansionary, I don't understand how you could come to any other conclusion," said Martin Weale, the institute's director. "I would have preferred a tighter fiscal policy and a somewhat looser monetary policy." The budget had added to the upward pressure on the pound which has hit Britain's exporters, he added.

The Bank of England's next opportunity to raise interest rates will come in three weeks' time. On Friday Mervyn King, its deputy governor, warned that growing consumer demand was likely to lead to higher interest rates.

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-- Carl Jenkins (Somewherepress@aol.com), April 16, 2000