It is customary, I know, to write a bright cheerful article which may be enjoyed over this excruciating festive season but I just cannot do it. The economic news is as perverse as it can be. The bulletins of the National Institute of Economic and Social Research generally make pretty gloomy reading and their pre-Christmas one certainly took the prize. While ministers go around boasting of their 5 per cent rate the authors of this bulletin simply won't hear of it. " Despite the low level of stockbuilding," said Mr Barber at the Lord Mayor's banquet, "industrial production has risen since the second half of 1971 — the base period I used in my budget speech — at an annual rate of 54 per cent. So far so good. We are on course!" Not at all, say these economic Jeremiahs. " Our judgement of all the information so far available is that, although the recovery from the depressed level of early 1972 is currently very sharp, the economy is running below the official target. Even using the output estimate of GDP which gives the most optimistic reading, we are perhaps one per cent below it." I can see Mr Barber reaching for his gun or another bottle of champagne. It is a little hard on him seeing that he helps to subsidise the wretched Bulletin.
Why stock-building has dropped so sharply — the ratio of stocks to output is now at its lowest level ever recorded — seems to puzzle these economists but it seems to me that there is a simple answer. Borrowed money is too dear to finance a big increase in stocks. The base lending rates of the banks have been put up to 74 per cent so that a trade may have to pay 94 to I() per cent for stock-building. Why cut your profit margins, say the business men, when the Government may be setting up a Price Commission in Phase 2 of its anti-inflation drive to monitor profit margins? It has always been an unfair feature of the freeze that it did not apply to bank lending rates. A direction from the Bank of England could have limited bank advances while the borrowing rates were frozen.
The bulletin of the NIESR sees the consumption boom slowing down next year as the result of higher prices. This Government started the consumer boom by remitting taxation to the extent of £3,000 million so that consumer spending in real
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actually 6+ per cent up on that of 1971. Next year the Bulletin sees a further rise of only 31 per cent. However, it is not unreasonably pessimistic about prices. On or before the freeze ends there is going to be a hefty rise in prices. First, the common agricultural policy of the EEC starts on February 1. Then VAT comes in on Budget day at 10 per cent — Mr Barber will not hear of a reduction — and although some goods subject to high purchase taxes will be lower, others in the food shops etc will be higher. Then there is the rise in some rents under the Housing Finance Act. Finally there is the general rise in import prices which follows on the 10 per cent depreciation of sterling since the Smithsonian agreement. The Bulletin says that as a result of all these unpleasant happenings the rise in consumer prices between the fourth quarter of 1972 and that of 1973 will be around 6/ per cent, which is about the rise we have seen in the last twelve months. I suppose we ought to be grateful if the Government can really contain the price inflation within that figure but it is more than double the price inflation President Nixon has been able to secure for the lucky Americans.
The rise in import prices due to the depreciation of sterling brings up the shocking deterioration in the balance of payments. Last year we had a current account surplus of £1,042 million. This year it has virtually disappeared! Of course the dock strike distorted the September returns but things began to go wrong in the third quarter when the monthly balance of visible trade rose to a deficit of £93 million compared with, an average deficit of £33 million a month in the first two quarters. Invisibles have held steady at £50 million a month so that we did not run into deficit on current trading account until the third quarter. The Treasury reports that between the first half of 1972 and the five months July to November exports increased on average by 3 per cent while imports rose by 9 per cent. A considerable part of this import increase reflects the higher sterling value of imports following the floating of the £, but what a miserable performance for exports which should have been helped by the floating £. Does it not suggest that a lot of our people are turning to foreign motor cars and Japanese electronic goods because they are better value or better made or better serviced? Not to mention their more reliable deliveries.
As regards the over-all payments account it has also run into deficit by reason of increasing private investment overseas. Net UK investment overseas in the third quarter at £300 million was double that of the same quarter of 1971. In the three quarters of 1972 the outflow was £970 million and the inflow of overseas investment into the UK was £444 millionOf the outflow no less than £546 million represented, portfolio investment. Investors here please note! As I have said before, when I was writing on investing abroad, / much prefer the American market which seems set fair for a further advance.
The bulletin of the National Institute is particularly depressing about the balance of payments in 1973. It estimates the deficit on visible trade at "over £1,000 million." Allowing for £660 million of invisibles, this will leave a current trading deficit of £340 million, which could be enlarged by dollar compensation payments to official sterling area holders of sterling under the Basle agreement and by the initial payments of £120 million or more to the EEC. It is fair to point out that the OECD in Paris forecasts only a small UK deficit in 1973 but its view may be prejudiced by ifs EEC set-up. There is no doubt that the beginning of 1973 will be extremely awkward for the UK. The huge Soviet grain purchases have raised freight rates and there is a nasty prospect of a jump in wheat prices not to mention the price lift of the EEC. How is the floating E to be pinned down for our entry into the EEC? The official answer has just bee(' given: it won't — the floating is to continue.
None of this gloomy prospect seems to have affected the Stock Exchange. The bull market has reared its head again during the " phoney " peace of the freeze. And it is enlivened by surprisingly good reports from such giants as GEC and Trafalgar House. If you add up your portfolio you will find some useful gains. So have a merry Christmas! But do not let this sense of well-being stop your taking profits in the New Year before the crunch
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