MONEY The coming slump

NICHOLAS DAVENPORT

The economic barometer is falling rapidly. The storm of 'a sizeable recession is blowing up—perhaps the worst since the war. Unem- ployment was last reported at 721,000 and looks like reaching a million before long— certainly if Rolls-Royce has to give up the RB 211 engine and force sub-contractors to close down. Bankruptcies apart, there are about 100,000 redundancies coming as a result of the industrial rationalisation ushered in by Labour! 721,000 is 3.1 per cent of the total labour force but a much higher num- ber-5 per cent to 7 per cent—are out of work for other than purely seasonal or tem- porary reasons in the 'development' areas. About 60 per cent of the men without work have been so for more than two months. The dole and supplementary benefits and odd jobs may remove the old hardships of unemployment but anyone who has lived through the great depression will know that nothing destroys a man's morale so quickly as the feeling that he is not wanted. The Government is taking special action to help the distressed areas—not before it is time. The Stock Exchange has at last realised that a recession is upon us and has sold industrial equity shares down towards the low level of June 1970.

The basic cause of the recession is the slow-down—one might almost say the col- lapse—in industrial investment. The present cni forecast is a dropS of 2 per cent overall in 1971 but a more useful index is the machine tool industry. New orders in machine tools fell by 42 per cent in the last three months of 1970. Even export orders were down by 21 per cent. An expert com- mittee has called for government aid for new investment if we are to stay in the front ranks of world machine tool producers.

The basic cause of the collapse of indus- trial investment is the conventional one—

very dear and very tight money and waning confidence in the economic future. Confi- dence has been shattered by the outbreak of massive industrial unrest—on political as well as industrial grounds. Strikes and slow- downs have interrupted the flow of produc- tion to a calamitous degree. Bankruptcies in the company world are rising sharply. The expected relief from a boom in the con- sumer trades has not materialised because the rise in prices has mopped up the rise in wages. Stocks of goods of all kinds are building up. The Department of Trade and Industry estimate a rise of 12 per cent in retail stocks compared with twelve months ago. Allowing for the price rise this is an increase of 4 per cent in volume. So the economic statistics point convincingly to an old-fashioned slump. And the new type of industrial unrest is holding up the old- fashioned way out—by orthodox reflation.

The economic barometer cannot, of course, be read without relation to the psy- chological barometer. This stands in the words of my period French barometer at Grande Tempete. Stubbornness, if not pig- headedness, has become the keynote of the industrial unrest. A trade union leader with mustachios like Mr Jackson's clearly wants to draw attention to himself and having done so in relation to an excessive and unaccept- able wage claim he becomes stubborn and will not budge. The state employer, Mr Ryland, also becomes stubborn and will not budge. Yet a 10 per cent rise would be a victory for the de-escalation policy of the Government and would bring the men back to their jobs in a trice. Mr Ryland may reserve his right to work out productivity schemes, which means, of course, cutting down the future postal services and reducing the numbers employed. Hardly the object of good trade unionism! The whole affair has

become a case for the psychiatrist.

But these are not the only people who are being obdurate. The Treasury or the Bank of England or both are being stubborn in not reducing Bank rate in spite of a further fall in us interest rates. Hot money has been pouring into London because our interest rates are far above those outside. It is un- wanted and potentially inflationary and it will be a great embarrassment to the ex- change authorities when it flies out again. Money has also been pouring into Germany because the dollar has been weak—the American payments deficit mounting stead- ily—and if Bonn is forced to reduce its Bank rate from 6 per cent it will be essential for the Treasury to reduce ours immediately from 7 per cent to 6 per cent. While the Bank keeps its strict control over the volume of Bank advances it is absurd to say that a reduction in Bank rate upsets the Govern- ment policy of refusing to finance the wage inflation. On the contrary it would tend to stabilise prices by reducing costs and unless prices are stabilised there is really no hope of stabilising wages. It is either stubbornness or wrong thinking on the part of the mone- tary authorities not to reduce Bank rate.

So convinced is the gilt-edged market that the authorities will be forced to act reason- ably and reduce Bank rate that the Govern- ment broker has been able to sell in the past few weeks probably £1,000 million of gov- ernment stock to the British and foreign fi- nancial institutions. There is no need there- fore to get nervous about the money supply. The fact is that while wage rates have risen by about 14 per cent over the past twelve months the money supply probably has risen by about half that amount.

It must have dawned upon the stupidest trade union leader by this time that the Government is determined not to finance wage inflation by increasing the money sup- ply. The banks have been told to allow a company to go into receivership rather than extend overdrafts to pay an excessive wage claim. It is a harsh policy and dangerous be- cause it is indiscriminate but it is being en- forced. The connection between rising wage claims and rising unemployment must there- fore be obvious even to Mr Jackson.

When everyone else is being stubborn and pigheaded it behoves the Government to set a better example and become more reason- able and more flexible. It has already shown its concern over the collapse in investment

by speeding up investment grants—one month earlier for capital expenditure in- curred in the June quarter of 1970—and bY extending the range and subsidies of the Special Development Areas It should now g0

further and say that it will relax its

monetary squeeze and will not drive small companies into bankruptcy regardless of

their merits but will see that the banks come to the liquidity rescue of those which are worthy of salvation. It would be absurd,

when the time comes for reflation, if the local instruments of reflation—the thou- sands of small companies which make LIP the private sector—were no longer alive. Perhaps Mr Barber is waiting for his bud- get on 31 March to hand out the honey but

the threat of a trade slump is serious enough to demand instant action. That action should take the form of a cut in Bank rate which IS

not incompatible with the Government's pol- icy of de-escalation of wage claims and Is the first necessary step towards reflation and

expansion. The role of Samson pulling clown the pillars of the temple on his enemies ill becomes an intelligent Prime Minister.