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The City

Published:  18 January, 2007

You can almost hear the anguish in London and Paris as Diageo and Pernod Ricard, the world's largest wines and spirits companies, watch the dollar plunging in value. Their next set of results will contain the almost habitual caveat that they would both have made larger profits had the greenback shown any signs of resilience and approached a normal' level.

After moving up to about $1.72 against the pound at one point in the early spring, the dollar has now plunged back below $1.84, with scant prospect of a rebound. That's great news for transatlantic holidaymakers but means pain if you have big business in the States.

The US monetary authorities have given the strongest hint possible that they are not going to shore up the weakening currency for fear of choking a faltering economic revival. That means exporters to the US, the world's most important drinks market, have to take the currency hit on the chin.

Diageo and its rivals can't increase prices to the US consumer to absorb the currency impact more than marginally, so they earn fewer pounds and euros per case and their bottom lines will be slimmer as a result.

Even so, while the currency effect will have a negative effect on the profit and loss accounts, shareholders in both Diageo and Pernod Ricard can afford a sip of their favourite tipple. In the past year, Diageo's shares have put on about 17%, while Pernod Ricard's have added more than 25%.

And it is not all gloomy news from around the globe. Europe, which has been a nightmare for several years, is at last showing signs of growth, and Japan is coming out of a decade of deflation.

These markets may not be booming, but at least they are starting to grow from solid bases, and crucially Japanese (and Chinese) consumers are moving to the higher-margin products that have given Cognac its recent shot in the arm.

So what about Britain? How is the economy? Will the consumer keep on spending? After a dismal first quarter, retail sales in general are picking up. True, April was an artificial month in that it contained a late Easter, but the out-turn was better than most expected.

The stock market is in territory that it hasn't tested for several years and the British Bankers' Association says that mortgage approvals in March were at their highest level since June 2004, all of which suggests a measure of confidence.

The seeming surge in home loan demand has to be tempered by the fact that a large proportion of this is simply people remortgaging while cheap rates last, but even so, house prices are continuing to rise, so the market remains firm.

But there are two huge clouds hovering over the high street - debt and energy prices. The money markets suggest that UK interest rates will be marginally higher at the end of this year than they are now, at about 4.75%.

That means a rise of just a quarter of a percentage point, leaving rates at well below their long-term average, and with the likelihood of a downward move early in 2007. When you are mired in debt, however, even a marginal interest rate rise is crippling, and a record number of Britons are going bankrupt, as revealed by figures published last week.

Add to that the impact of soaring domestic fuel and motoring costs, and there is strong evidence to suggest that consumer confidence is brittle and that increasing retail sales is going to be problematic.

Remember, price levels across the board at Tesco, Britain's biggest retailer, fell by 1.8% last year. For every borrower, however, there are six lenders, so marginally higher rates mean they have more money in their pockets and purses. And the UK economy is growing solidly; even factory output is at its highest level since 2004.

Overall, therefore, there are grounds for mild optimism. Which just leaves everybody going to the LIWSF at ExCeL next week to discuss the weather. A long, hot summer would be just what the drinks trade needs.

After all, with hosepipe bans proliferating, what else is there to do in the garden other than relax and enjoy a glass of something refreshing?