The Economic Outlook—I
Pound The Fight for the
By F. W. PAISH* THANKS to a continued rise in saving and to a slowing-down of the rise in fixed investment, by the end of 1957 the excessive pressure of in- ternal demand had been much reduced, if not eliminated. There remain two major questions to be answered in 198. The first is whether the elimination of excess demand is sufficient in itself to check the inflation which has persisted in greater or less degree ever since the war; and the second is how far the resources released from serving home demand can be absorbed in pro- ducing either exports, or substitutes for imports. Upon the answers to these two questions depends this country's chance of securing for the first time in 1958 a favourable balance of payments large enough to guarantee the permanent stability of sterling as an international currency.
The answer to the first question, and in part also to the second, depends in turn largely upon the results of the wage negotiations now in pro- gress or soon to be initiated. There are two views about the cause of the rise in prices during recent years. One is that it has been due to the general pressure of excess demand and that, even if there had been neither trade unions nor collective bar- gaining, competition between employers for labour would have caused wages to rise by at least as much as they have in fact risen. The other view is that it is the pressure of trade unions for higher wage rates which has been the initiat- ing factor, and that prices have risen because labour costs have risen. These conflicting theories, that wages rise because trade unions ask for higher wages, and that they rise because em- ployers can afford to pay them, are now about to be put to the test. Within the next three or four months we shall know the answer.
To check inflation it is not, of course, neces- sary to avoid any rise at all in wages and money incomes. Inflation may be defined as a condition in which money income rises faster than real income, and, so long as real income is rising, a corresponding rise in money incomes means merely that the benefit of the rise in real income appears in the form of higher earnings rather than of lower prices. With good luck, including the benefit for a full year of the improvement in the terms of trade which has already occurred, the rise in real national income from 1957 to 1958 may be of the order of 3 per cent.; a rise of this proportion in the average level of wages, earnings and money incomes would therefore probably be consistent with stability of prices.
The second question the whether, given the essential prerequisite of the cessation of inflation, it will be possible to divert the resources so re- leased to securing in 1958 a balance of payments surplus large enough to meet all commitments and ensure the stability of sterling. The necessary surplus cbn current account has been put at not less than, £400 million, of which perhaps half would, be needed to cover the exports of long-, term capital which, so long as there are no ex- *Professor of Economics, London School of Economics. change restrictions on transfers to the rest of the sterling area, cannot be prevented from leaving the country even by high interest rates. The other half is needed to provide for repay- ments of short-term debts (including obligations to the European Payments Union, the Inter- national Monetary Fund and the Export-Import Bank) and, if possible, for the replenishment of the quite inadequate gold reserves. If ithad been possible to check the British inflation in 19$5, and 1956, when business in the United States and in the world as a whole was still on the upswing, there is little doubt that the objective of a balance of payments surplus of £400 million could have been achieved without serious difficulty. In 1958, with a trade recession developing in the United States, the difficulties will be greater.
For the first time since the war, these diffi- culties may take the form not of finding the neces- sary resources after satisfying home demand, but of finding markets for 'the products of the re- sources so released. By the end of 1957 there was probably a sufficient excess of saving over fixed investment at home to, finance both a normal increase in the volume of stocks and an export surplus of almost the magnitude de- sired. It would seem that only an exceptionally large increase in the volume of stocks has pre- vented the development either of a much larger favourable balance or of a larger margin of un- used resources. As soon as the level of stock accumulation declines, the question will emerge whether we can improve the balance of payments sufficiently to find employment for at least a high proportion of the resources available.
Despite the check to expansion in the United States, the outlook is by no means wholly un- favourable. Always provided that British pro- ducts remain competitive in prices and quality, and that the limitation of home demand obliges exporters to attack overseas markets with vigour and perseverance, there are a number of British products for which the market in the United States could be expanded even in a period of less active trade. There are also some sterling area countries whose buying power has not so far been seriously affected by falling commodity prices, and others which can maintain imports during a period of temporarily lower export prices by drawing on their sterling balances, while activity in most of Europe remains high.
If, nevertheless, it be- comes clear that the resources released by the limitation of home demand are not being adequately used for the improvement of the balance of payments, the question will arise whether and how to re- expand demand. • Since it is to be hoped that any check to world business activity will be temporary, it would seem unwise to concentrate attention on the re-expansion of home demand, for this would necessitate renewed restriction as soon as overseas demand revived. It would rather seem desirable to take steps to support overseas de- mand at a level which would permit the develop- ment of a favourable balance of payments on income account of the desired magnitude, even though more of it was temporarily devoted to long-term capital exports and less of it to repay- irrg dollar debts and augmenting gold reserves than It would be hoped to devote in later years. It is therefore suggested that, when the time comes (and this cannot in any case be before the settle- ment of wage claims at a level consistent with price stability), the relaxation of restrictions on demand should take a form which would en-' courage demand to expand abroad as well as at home. This would mean a relaxation of monetary and financial 'restrictions rather than of taxation, and in particular a relaxation of restrictions which reduce the export of capital to facilitate payment for British exports.
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