Trading at a Deficit
By NICHOLAS DAVENPORT ONE has to go back to 1955 to 111" find a trading year so bad for us on international account as 1960. In 1955 we had a deficit on visible trade of £356 million and a surplus on 'invisibles' of £256 million. After allowing for interest on dollar loans and net defence aid, which virtually can- celled out, we closed our inter- national account then with a der • flett of £92 million. It was regarded as disgrace- ,_'`", for we had been taught by the Government "' believe that a surplus of over £300 million a /Potkair was essential in order to meet our defence :Zigations, finance overseas investment and pro- 11,:e aid for underdeveloped nations. Yet this it looks as if we will end up with a deficit Idr £100 million—perhaps even double the lu,cit of 1955. If this had happened with a 0ur government in power, there would have i:eert an appalling slump on the Stock Exchange. to\ en so, the City is beginning to feel uneasy and b \yonder whether another exchange crisis can avoided in 1961. ti .1 he overseas trade figures published by the of Trade are not, of course, the `visibles' i'tiearing in the balance of payments tables, but be used for comparison. The October returns 1 ere distorted by the tally clerks' strike at the ,Iii(!ndon Docks. The November returns published ' Week showed an improvement in exports, the to"13 being £66 million against £107 million in h etober. If we take the nine months' figures we 0111 that the average monthly excess of imports iw‘et. exports this year is £27 million worse than it 't 4 in 1959. Imports have been running 13 per 1,ue,ilt. above the 1959 level. In the third quarter steY slackened pace, indicating perhaps that the b„9i118-up process is at last coming to an end, C" Imports of basic materials were still 14 per 0111. above and imports of finished manufactures 4() less than 25 per cent. above those of a year Exports have been also disturbing, being 'tie more than 5 per cent. above the 1959 aver- '0 volume, exports in the third quarter were allY 1 per cent. below those of the second 14,arter and 4 per cent. below the first quarter. Motor slump was the biggest factor in the troport failure, car exports being 33 per cent. tervvn in the third quarter. And for the short th‘rn the situation may worsen. The correction of t'ile American payments deficit is bound to hit lAenIr "Port trade. The tie-up of American aid to ter .rIcan goods, the return ,home of American ,Iri,,'.,1co families, etc., are calculated to reduce our ‘i!°1e trade by about £50 million and our in- es by by another £50 million at least. 1 According to the National Institute of (r,°.noinie and Social Research a recovery in ti.h exports will only take place when world ''' is again expanding fast enough to offset ,e continuing fall in the British share in the ;0r1d export of manufactures. This is perhaps tomduly pessimistic. A revival in British exports 4e4.41 Come when British salesmanship and sign are improved, when the small firms are organised in export groups, and when export credit finance is further enlarged. Of course, if the present Government will never take any action on these lines except in export credits, if it contents itself, with repeated exhortations to exporters, if the Prime Minister says once again that exporting is fun, then the outlook is indeed bleak.
The deficit on our visible trade would not be so serious—after all, imports must decline before long if the Government is determined to have a domestic slump—if it were not for the decline in our 'invisible' balance. According to NIESR estimates this is' going to be the worst year for Invisibles' since 1947. Three items account for the deterioration—lower shipping earnings, higher government expenditures (defence, etc.) overseas, and lower net 'interest and dividends.' The last is largely explained by the rise in interest rates. An extra 1 per cent. on the total sterling balances costs us over £40 million a year. There is not much hope of our 'invisible' inflame rising until shipping and oil industries emerge from their depression. The NIESR puts our 'invisible' surplus this year at only £115 million (against £237 million last year and nearly £300 million in 1958), leaving our final balance of payments at a deficit of around £100 million.
The only quick way to cure a balance of pay- ments deficit is by reimposing import and exchange controls. This the present Government is certain not to do. Instead, it will rely on cutting the public investment which is under its direct control and reducing private consumption through hire-purchase restrictions. The danger of this policy is that it activates the forces making for a domestic trade depression which will in turn restrain private enterprise investment and work against the export trade. The Government seems prepared to take this risk because it is scared of a wage-cost inflation. Mr. Lloyd has, in fact, fallen back on the Thorneycroft policy of trying to stop wage claims by threatening a slump. I do not believe that the trade unions on this occasion will be so frightened as they were by Mr. Thorneycroft. Mr. Lloyd will get his slump and a wage-cost inflation as well—calcu- lated to make British goods largely uncompetitive in the world's markets. What makes the Treasury policy so hopeless is that it does not even drive labour from the trades which are being squeezed to the trades which could expand. Short-time working has been accepted by both employers and workers. We are becoming a dear-cost economy.
The right way to deal with this awkward situa- tion is to bring capital and labour to a joint conference to settle such questions as a five-year investment plan and the distribution of labour to implement it. We shall need, as I have said, two controls—one over building, the other over investment overseas. These could obviate the re- imposition of import controls. Money could then be cheapened and made easier. When Bank rate was reduced to 5 per cent. last week for external purposes, the Treasury immediately took steps to see that the rate of interest did not fall in the domestic market and kept the banks guessing as to whether it would release their special deposits next month. This is a foolish policy. We need to stimulate the economy in the right places. If there is any flight from the £ the Treasury should let the reserves (now over $3,000 million) take the knock and if necessary draw another line of credit from the IMF, where we now have an uncommitted quota of $1,950 million. If an exchange crisis does develop—so what?
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