16 JANUARY 1988, Page 22

THE ECONOMY

Waiting for something to turn down

JOCK BRUCE-GARDYNE

mr Robin Leigh-Pemberton believes in living dangerously. Two weeks into the new year he still awaits confirmation from 10 Downing Street that he is to enjoy a second turn as Governor of the Bank of England when his first is up this summer. Nigel Lawson tipped the wink around in the closing months of 1987 that, as far as he was concerned (and notwithstanding occa- sional appearances to the contrary in days gone by) nothing would please him better than to complete his stint at the Treasury with Governor Leigh-Pemberton in har- ness. As one of the more ill-mannered hacks of Grub Street put it, why displace King Log to make room for King Stork? Nevertheless the choice is not his: the Governorship is in the Prime Minister's patronage; a word from her is overdue.

Yet off he goes to the land of jute and jam and journalism and McGonagall to tell the Dundee and Tayside Chamber of Commerce that 'the growth of domestic demand' — at any rate up to Black Monday — was `unsustainably rapid': and to leave the distinct impression that, in the Bank of England's view, the pace is not exactly staid even now. Understandable, certainly, since the latest readings from the speedometer suggested 9/2 per cent for the non-oil economy, with the national savings ratio shrunk by borrowing to its lowest level for almost 30 years. And on past performance our actual road speed as the old year gave way to the new is likely to be revised upwards retrospectively as more information becomes available. But to the City of London this meant one thing, and one thing only: that the Bank was itching to reverse the late autumn cuts in interest rates.

Now apart from anything else, the Chan- cellor has on frequent occasions recently made short work of the polite convention by which interest rate changes are the province of the Bank of England. Admit- tedly it's a long time since anyone took that convention seriously. But Mr Lawson has little patience with proprieties, and has publicly reiterated that so long as he's around interest rates will go up or down when he says they should, and not before. As for the Bank of England (the impress- ion has been given), it should concentrate on sorting out the wide boys in the City — with guidance from the Treasury, of course — and leave the management of the nation's business to the grown-ups in Whitehall. Furthermore, Governor Leigh- Pemberton's obiter dicta disturbed the peace and calm of the Chancellor's annual country house weekend with his mandarins and their ladies at the ancestral home of the Stanhope family just outside the M 25.

Fortunately, perhaps, for his future em- ployment, the Governor's asides were swiftly drowned by Wall Street's 'mini- meltdown' the following day, and as a result the weekend house-party probably spent more time considering how the parti- cipants should respond if we were in for a repeat of the October crash when the markets reopened on Monday.

Which, happily, we weren't. In fact, as this issue of The Spectator goes to press it looks as though that spectacular bear-trap sprung by the central banks immediately after the Christmas holidays has worked. To those of us who recall the glamorous Sixties, when Governor Cromer would ring his siblings round the world to come to the aid of the beleaguered pound just when it seemed to be beyond recall, it was like old times. They had left the bears to creep up on the dollar as the rest of us were digesting our plum puddings. And then they had pounced, scattering the bears.

Whether the bears will remain scattered depends a lot — too much for comfort — on the November figures for US interna- tional trade which were due to be unveiled this Friday. A $14 billion deficit — or less: result, happiness. A $16 billion deficit — or more: result, misery. Optimists assure us that the Chairman of the US Federal Reserve Board Alan Greenspan would never have spread the word around that the November trade returns were going to be chipper, as he did, unless he knew that they were. Only the unfounded cheerful- ness which Mr Greenspan spread around about the August US trade returns was a not insignificant factor in the ensuing Wall Street rout. Let's hope he's got it right this time.

Supposing he has, though, the sort of nervousness displayed on Wall Street last Friday is a pointer to the market environ- ment in which we are likely to be living at least until a new administration is installed in Washington. Dealer sentiment is fun- damentally sour. Like Philip Guedalla's civil servants, they are inverted Micaw- bers, waiting for something to turn down. It is liable to require more than one successful bear-trap to restore a healthy glow to the stock markets.

Against this background there is one point at least about which our Treasury and Bank are evidently in perfect harmony: and that is that US interest rates should rise. On his excursion to Tayside Mr Leigh-Pember- ton reinforced the Chancellor's unsolicited advice to the US Fed to that effect. That, too, is very understandable. For unless and until the American authorities display a willingness to tighten their monetary con- ditions the dollar, and hence also the stock markets, will remain vulnerable to bad news (or even, as we saw last Friday, pessimistic speculation) about the trade figures, the federal budget deficit, new rules to govern Wall Street, or almost anything else you care to name. Besides, both Treasury and Bank have their own domestic reasons for wishing to see dearer money on the other side of the Atlantic, even though they would not care to ack- nowledge them. These are that, without a prior rise in US interest rates, a rise in rates at home, which the Bank clearly yearns for, and which the Treasury is perhaps beginning to see the need for, might push the pound back up against the Chancellor's self-selected ceiling of three deutschmarks. Moreover, for us to go it alone in the direction of dearer money would not make us popular with the rest of the Group of Seven top finance ministers.

Unfortunately, however, the combined longings of Chancellor and Governor seem for the moment to be a little reminiscent of those of Lord Lundy's grandmama, who yearned to be young and spry at the age of nearly 93. For once again President Rea- gan has let it be known that the American trade deficit is 'a sign of strength', reflect- ing his fellow-countrymen's ability to buy foreign goods. Let us hope that he had the courtesy to thank Japan's Mr Takeshita, when he dropped in at the White House this week, for supplying them.

So the dialogue of the deaf between the US administration and its trading partners proceeds. The trading partners see little prospect of a sufficient contraction in the trade deficit until Americans curb the ability in which the President takes so much pride, while the Americans see no good reason to take the trade deficit seriously while the US economy continues to create jobs and to enjoy an export boom in defiance of the regular predictions of the gloomsters.