Bug that is throwing the economy off balance

	Sign In Sign-Up

by Angus McCrone

The ears of Eddie George and his colleagues on the Bank of England's monetary policy committee must be burning as trade unions, industrialists and small businesses curse the Bank's interest rate policy and the painfully high level of the pound.

This criticism, however, heard loudly last week as Rover announced job losses, is poorly aimed. The real "blame" for the unbalanced state of the British economy lies elsewhere - on economic policy errors in 1996 and 1997 by successive Chancellors; and on the market assumption that Britain will join monetary union in 2002 at an exchange rate equivalent to about 2.60 Deutschmarks.

As I argued in this column earlier this month, that assumption implies a minimum value of Dm2.87 for sterling now, given the interest rate gap between Britain and Germany. There may be one other distortion at work, making an important industry peculiarly resistant to the Bank's interest rate medicine and hence adding to the unbalanced state of the economy.

That destabilising influence is the scramble by British organisations to prevent computer meltdown on 1 January 2000. Anyone who doubts that millennium bug work could have macroeconomic significance should ponder the latest estimates.

Taskforce 2000, the body set up by the Government to raise awareness of the problem, reckons that Britain would have to spend £32 billion to squash the bug completely. The outlay is unlikely to be that large in practice, but it thinks £7 billion to £8 billion has probably been spent so far, with another £12 billion in the next 12 months.

Another authoritative estimate comes from British software industry expert Richard Holway. He thinks work by computer service firms on the bug is likely to total £5 billion to £6 billion in 1998, compared with less than £3 billion in the years up to the end of 1997. Holway's figures exclude work done by in-house programmers at British organisations, which may well be about as much again.

So our estimates point to total bug spending in 1998 of perhaps £10 billion. If this was all additional activity for the economy, it would add a massive 1.5% to British gross domestic product this year.

However, it is not as simple as that. First of all, work on the bug will to some extent be displacing other systems projects that would have happened otherwise.

Second, what matters in terms of the GDP boost is the extra spending in 1998 compared with 1997, and this would be likely to be £5 billion on the estimates above. Third, it might be worth factoring in the systems work on another one-off - monetary union - as well.

Taking all three points into account, my guess would be that the bug might increase British economic activity by about £3.5 billion this year, equivalent to a still-substantial 0.5% of GDP.

Rattled by the idea of a year 2000 disaster, the boards of many companies have handed their computer departments something close to a blank cheque, and told them to sort it out.

The computer specialists, in turn, are jumping at this chance not just to do a stitch job on the bug, but also to chuck out all their old systems and buy in the latest kit.

The IT sector is in full-blown boom. You have only got to look at the share prices of its main companies to see that. There will be a hangover one day, but in the meantime IT is propping up overall economic growth and the sector's spiralling wages are pushing up those average earnings figures that have so worried the Bank of England.