In the City
The intractable recession
Nicholas Davenport
The Chancellor has been trying to cheer us up — and himself too. He told the House of Commons last week that he hoped it would be possible to reduce the rate of interest-64 per cent M.L.R. to 6 or 54 per cent? — and that he intended to take 'full advantage' of the scope for stimulating the economy in his budget on 11 April. He even took a cheerful view of the prospects for increasing industrial production in the months ahead. He was obviously whistling 'down the wind' — to keep his courage up — for he is no doubt aware that the present recession in world trade is much more difficult to cure — and much more dangerous in its social aspects — than the great depression of the 'thirties.
As I came into the City as a young man at the time of the Wall Street crash I have been turning up some old pieces I wrote about that crisis. It was much more dramatic than the present. Some $40,000 million was knocked off the value of Wall Street stocks in a matter of weeks. Millions of American families had all their savings wiped out. Hundreds of banks in the United States crashed and closed their doors. A Canadian bank manager, who had an office facing the American frontier, told me that he could see from his window a long traffic-jam of motor cars waiting to cross the border. The panic-stricken Americans were trying to get into Canada to deposit what little was left of the family savings in a sound Canadian bank. The whole of the American business world was plunged into a catastrophic slump. But it was not difficult to take corrective measures. All Roosevelt had to do, instructed by Keynes on deficit spending and demand management, was to pump in government money and start up public works. It took time because the recession was massive, but it worked. Roosevelt did not have to worry about inflation. The fantastic Wall Street boom, which blew itself up, was generated in a period of stable money. Americans had enjoyed seven years of stable commodity prices. There is another big difference between the depression of the 'thirties and the recession today. In the 'thirties the unemployment was far worse and brought great physical suffering. Families literally starved. Our own miners went back after the general strike of 1926 on wages which in real terms were no better than pre-1914. Today there is no starvation. Thanks to the welfare state some unemployed are even better off. But there is great anxiety and much mental stress. Another difference: the trade union movement is much more powerful today and can exact wage rises, which are cost-inflationary, even during an inflation. Hence the reluctance of governments to pump in money while their inflation rates are still too high.
The prime minister has confessed that he is very worried by the intractability of the present world trade recession. The growth programmes which were agreed upon at the economic summit in Downing Street in 1976 were never implemented. The Germans and the Japanese have been building up huge export trade surpluses and not allowing their imports to rise sufficiently to help other nations' exports. The German Chancellor has been accused of doing a Bruning — the pre-Hitler Chancellor who refused to allow deficit spending to help employment. (Incidentally Briining was not responsible for the rise of Hitler, who was born out of his anti-semetic neurosis and the hyper-inflation which whiped out the middle class, but Bruning's deflation undoubtedly played into the evil hands of Hitler.) The German Chancellor, Helmut Schmidt, has been angrily replying to the American and British demand for more reflation by arguing that it would make no great dif ference to the world economy. He points out that he has reduced his discount rate to 3 per cent (against 7 per cent in 1974), has cut taxes to give consumers $51 billion more to spend this year and is introducing a supplementary budget to push public spending up by 10 per cent and the GNP by 34 per cent. Undoubtedly he could do much more. The German economy is stable enough to allow for a 6 per cent or 7 per cent growth rate.
Japan has been even more recalcitrant than West Germany. Her prime minister has so far refused all American and EEC requests to cut their exports, although he agreed with the American trade secretary to aim at a 7 per cent growth rate this year. Japan refused point blank our special request that they take a smaller share of the British car market. The apparent reason for this obstinacy is that Japan is fearful of its own recession. Last week the biggest producer of housing materials in Japan (Eidar) went bankrupt with liabilities close on $1 billion. Business failures have been rising ever since the oil price crisis and last year reached a record total of 18,471 companies, leaving nearly $12 billion of debt. There must be something wrong with the Japanese economy when their workers cannot afford to buy their own motor cars and have to fail back on secondhand models imported by an enterprising British firm.
We must all be thankful that President Carter is allowing the United States to run a payments deficit of some $40,000 million and the dollar to sink in the exchange markets. (This may teach the Germans and the Japanese, whose currencies will become dearer, not to be so obstinate). But in spite of American reflation the outlook for world trade is distinctly bleak. The latest CBI inquiry into our industrial trends (20 February) revealed a sharp loss of export orders due to reduced competitiveness (the higher £) and the depressed state of the world economy. No wonder Mr Callaghan feels alarmed at the intractable nature of the world trade recession and is fearful 01 import restrictions which would make il worse.
The Chancellor cannot reflate our own economy by as much as the TUC demands..
which is over £3,000 million, but he could come quite near it. The National Institute of Economic and Social Research suggests £2,500 million — £2,000 million in tax cuts and £1,500 million in extra government spending. Note that reduced tax rate bands with the first £1,000 at 25 per cent would cost about £2,000 million.
The serious nature of the intractable recession seems to have dawned on the old boys brigade in the City. Technical rallies in the equity market quickly dry up and prices drift downward on little but persistent vol ume of selling. The third quarter report of ICI, our biggest company and greatest world trader, gave support to the bears. Pre tax profits were down from £540 to £480 million and the prospect for its fourth quarter is that worse is to come. The FT index of industrial ordinary shares is now 20 per cent down from its top and a bear market usually registers a 334 per cent drop. But 11 April is round the corner and the most powerful Chancellor we have had for many years is getting ready for his great reflationary act.
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