Extra day's holiday may be bad break for economy

LONDON BRIEFING:The Olympics are expected to provide a boost to the economy in the third quarter

AS BRITAIN returns to work today following its four-day celebration of the queen’s 60-year reign, economists are calculating the impact of the jubilee holiday on the nation’s struggling economy.

Makers of bunting and union flags will have no complaints, and the supermarkets served up several tonnes of party and picnic food despite the inclement weather. But while holidays lift the mood of the nation, they’re bad news for the wider economy, and it’s feared the extra jubilee day off could drive Britain deeper into recession.

The ultimate impact of bank holidays on the economy is hard to calculate and estimates vary wildly. Sir Mervyn King, governor of the Bank of England, puts the cost of the extra day for the jubilee at 0.5 per cent on second quarter GDP but believes there will be a bounce back in the third quarter. A similar effect was seen with the additional holiday granted last year for the royal wedding. This year the Olympics are expected to provide a boost to the economy in the third quarter, helping to smooth out the jubilee effect over the full year.

Economists at the Centre for Economics and Business Research (CEBR) say each bank holiday costs Britain £2.3 billion, and that scrapping them would boost annual output by £19 billion. Nobody is seriously calling for holidays to be scrapped altogether but the CEBR has argued that spacing the days off throughout the year might help prevent the economy losing momentum.

Other economists have suggested that, rather than having set days for bank holidays, people should be able to choose when to take their extra days off, as they do with annual leave, which would smooth out the effect. It would, however, make organising a street party somewhat problematic as half the householders might be at work as usual.

By delaying the late May bank holiday to Monday and tagging the jubilee day after it, many people will have been encouraged to take an even more extended break, which would amplify the effect of the additional day, with some smaller firms deciding to shut up shop for the entire week.

Economist Howard Archer at HIS Global Insight believes the overall impact of the jubilee break will be “pretty modest” over the year as a whole, with some of the lost activity made up later on. But for second-quarter GDP, the impact will be significant, he says, and could well result in the third consecutive quarter of contraction, extending Britain’s double-dip recession.

Sir Mervyn King and his colleagues on the Monetary Policy Committee won’t be among those taking an extended break this week – they gather at the bank today for their two-day monthly meeting to decide policy on interest rates and quantitative easing. They’ll have plenty to talk about this month – as well as the jubilee holiday they have the advice of the IMF’s Christine Lagarde to take into consideration.

She has urged the UK to consider pumping more money into the economy to stimulate growth, and even suggested that interest rates, at a record low of 0.5 per cent, where they’ve been for over three years now, could be cut still further.

Survey data for the crucial services sector will be released this morning and could well prove the deciding factor on QE – if the news is bad the bank may well decide to follow Lagarde’s advice, and make a move. We’ll know at noon tomorrow.

Investors at Xstrata

angry over bonuses

Xstrata chairman Sir John Bond has a tricky week ahead as he embarks on a charm offensive among the mining group’s shareholders, who are up in arms over massive retention bonuses awarded to executives in their £60 billion merger with Glencore.

In total, £240 million is being paid out to Xstrata managers, the vast bulk of it in retention packages, which have no performance strings attached.

Xstrata chief executive Mick Davis stands to collect £35 million.

Xstrata has form on excessive pay and suffered a 40 per cent protest vote at its recent annual meeting.

Investors have been further angered by the group’s decision to tie the vote on the retention bonuses to the merger itself, which looks like a none too subtle attempt to railroad shareholders into approving the payments if they want the deal to go ahead.

Leading shareholder Fidelity slammed the payments as “provocative and insensitive”, and said the company was putting the interests of its managers ahead of those of shareholders.

Another institutional shareholder, Standard Life, has described the retention windfalls as “unacceptable and depressing”.

Sir John will have his work cut out.

Fiona Walsh writes for the Guardian newspaper in London