In the City
The City in recession
Tony Rudd
There always has been a marked contrast between what is going on in industry and What is happening in the City. Glum faces round the City luncheon tables coincide With fairly cheery countenances in industry, while depression in industry seems to find the City in relatively cheery mood. All because markets are supposed to signal nine months or more ahead what is going to happen. So instead of being gloomy about today's appalling news, market men are discounting the end of the recession in 1982. Or that is what the classic theory holds to be the case. It is comforting to believe it because it also happens to be the only way of making sense out of the present extreme contrast between the misery north of Watford and the continuing jauntiness of City markets. But the question occurring to some, on this occasion, is whether, this time, the markets have got it right. Perhaps they haven't and there is a big collapse to come.
But for there to be a collapse it is not just enough that industry has to suffer. There has to be a financial collapse as well. This is What happened in America in the early Thirties and in a minor but (while it was happening) frightening manner here in 1974. A collapse in market confidence, a rush for liquidity and a sudden lowering of values is what marks a classic crash. One suspects that this is not what is going to happen during 1981 and 1982. Paradoxically the financial world is almost too well organised and too strong this time round for anybody involved in it to be seriously worried about industry. Thus, compared with 1973, the year before the financial collapse of the fringe banks, there was a very over-extended borrowing position. Everybody had geared up on either Property or shares or both. This time there is really very little borrowing against either. The liquidity of the system is pretty sound. Moreover financial institutions have been enjoying a good year. The stockbroking community had a good 1980. The banks, as We know, are awash in profits. The merchant banks have been doing good business and their shares have been in the ascendant. And that bellwether of the financial sector, the property market, has seldom looked better placed. Property shares indeed are at or near a peak. In a sense the property scene is the most remarkable of all, given the industrial decline. It was always said to be the case that if the economy as a whole did really badly investors would look critically at the vulnerability of many companies' rent rolls (because if there is one thing ,bankrupt companies don't do it is pay the rent) and would sell. But this isn't happening. Indeed, property companies are apparently managing to achieve remarkable levels of rental when reversions fall due. I heard of a leading public company which had a shopping development in, of all places, Hull where the rents had just been trebledon the occasion of the first review since the development was built ten years ago. How on earth can the shopkeepers of Hull, a depressed area if there ever was one, afford such increases? In the City itself of course it's for ever upwards so far as rents are concerned — £20 to £30 a square foot is apparently going to be nothing in a few years' time in the Square Mile. All of which seems to bear out the original dictum that we are indeed a nation of shopkeepers. The only miracle is how we can afford it. Perhaps the answer is that even in a depression as bad as the one that we are now in, there is a great deal of prosperity for those still in business and still in work. It is almost a case of the worse it gets the'better it is for those still left in the game.
There is, however, a further reason why the stock markets have not followed the economy down into the abyss and that is that the parts of industry worst affected are not heavily represented in the share market. This is one of the results of nationalisation. If the steel industry was still in private hands, there would be a good deal more gnashing of teeth in the City. As it is, the virtual demise of the specialist private steelmakers has only affected less than half a dozen quoted firms. Although Guest Keen is one of them, with such a large group the effect is only marginal. Admittedly engineering and electronic industries have fared better and so has the chemical industry. And even the building and con tracting industries are thought to have seen the worst in the sense that a decline in interest rates, which is now confidently expected in the Budget, will ease their difficulties considerably. These areas are however sheltered, so far as many of the big companies are concerned, by big overseas interests. And the market as a whole is held up by the financial areas, the service companies and a number of large truly international businesses. This is why, unless the City is hit by a direct financial crisis, critical conditions in industry do not feed back on to the stock markets in the way that many people would expect them to.
Historically the British markets have never been all that closely tied to British industry, London has been an international centre since it was invented. It is only in the domestic banking sphere that the tie-up is really close; in the capital markets London looks outwards. That has been its strength and its weakness. It has made it resilient in times of stress, it has freed it from the penalties which it would have incurred if it were tied to the British industrial cycle (and indeed its secular decline) and it has set the Square Mile apart as a place of success and of dynamic expansion. But it has also meant that, although there is no actual shortage of capital for industry as such, the brains and the endeavour within the Square Mile have not roally been harnessed as they might have been to the needs of British industry in the way, for instance, that the resources of Wall Street have been successfully harnessed to the development of new industries in America. Call it a 'Macmillan gap' or what you will, whether or not the Wilson Committee actually found it, it exists and it creates a problem.
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