When a company of such pre-eminence as Marks & Spencer is so wrong-footed by economic developments, the industry of economists can be forgiven for having failed to read the 1998 runes correctly. But unprecedented M&S autumn price reductions to shift excess stock provided the most emphatic and convincing evidence of the turn in the business cycle marked by involuntary stock-building that is casting such shadow over 1999 prospects.
Until M&S spelled out the build-up of excess stocks, 1998 looked like running to the economists' form book, with inflationary pressures still buoyed by consumer demand despite weakening growth in manufacturing industry. Over the summer and into the early autumn, though, consumer confidence was badly damaged by the combination of the global financial crisis, stock market collapse and high UK interest rates. The downturn in consumer confidence could not have been worse timed as it co-incided with delivery of record orders to retailers who had been led to believe that autumn would see bumper autumn sales - and involuntary stock-building has been the inevitable consequence.
Most conspicuously, the Bank of England's economists took time to adjust to the sudden turn in the business cycle, chopping interest rates with reluctance reflecting a desire to cling on to the former fears of inflation. Now, if we take involuntary M&S stock-building as the turning point, the 1999 economy will mainly be dominated by the duration and impact of the de-stocking phase of the business cycle. The key role of stock levels in the coming year is emphasised by Schroder Economics in its 1999 prognosis. It notes that the outlook for inflation has improved in recent months as the prospects for activity have deteriorated.
"Of particular concern is the rise in stock-building, almost certainly involuntary," say the Schroder economists. On average, two-thirds of the last three UK recessions - 1973-75, 1980-81 and 1990-92 - have been accounted for by de-stocking. Since the Confederation of British Industry says stock adequacy is at its highest level since 1980, the probability of an economy-wide contraction in output has now increased to the extent that it has become the central forecast for Schroder Economics. Most other economists, including the reluctant Bank of England department of economists, are coming round to a similar view. But opinions differ on how the impact of de-stocking will be felt through the economy. Perceptions, too, are going to important.
After all the hype given to the 1996-98 consumer spending boom, there is every chance that the impending 1999 downturn will be greatly exaggerated. Zero economic growth, rising jobless numbers, worsening trade figures and increase in government borrowing will be paraded in a litany of hyperbolic woe. The gloomsters and doomsters will not be short for copy. Already, predictions of deflation amidst a 1930s-style slump are becoming commonplace. But the reality may well be very different from the perception. For a start, unlike 1990-91 situation, corporate and household balance sheets are relatively healthy.
Inevitably, there will be corporate fatalities, particularly in the small business sector. But the destocking contraction is unlikely to broaden into widespread retrenchment in the face of a cashflow squeeze.
