MONEY AND THE CITY
The phoney peace
Nicholas Davenport
When the boys at Westminster break up for their summer holidays there is always a sigh of relief in Throgmorton Street. The stock markets are then allowed to pursue a more even course without disturbing cries from Wedgwood Benn, Michael Foot and other trumpeters of the anti-capitalist revolution. At the moment there is good enough news of an economic nature to make markets even go higher. But let us make no mistake. If markets do break into new high ground it is because we are entering upon a phoney peace. As The Spectator has reminded us, the Government and the TUC have wisely agreed to avoid an ugly confrontation and even the dockers will some time want to settle and take their legal holidays on full pay. The TUC have condescended to join in the constructive talks at Downing Street with the Government and the CBI about our economic problems — presumably because the Government have, in fact, suspended the Industrial Relations Act. Mr Heath has not attempted to seek an order for a cooling-off period in the docks simply because he knows that the Government would be unable to enforce it. So the peace, welcome as it may be, is phoney. The real war goes on, which is the war of the wage-cost explosion. Nothing is going to stop the autumn round of inflationary wage demands. How far these demands are concerted, as in a revolutionary campaign, no one can say. The Troskyites certainly have not forgotten that Lenin once said: " If you want to wipe out capitalism, debauch the currency." I have also a record among my papers that a director of the IMF once said: "The world has made up its mind that it will not have a great depression again. But if the present inflation goes on unchecked, it will not have a great depression; it will have a great revolution)' There is nothing more socially divisive than a raging inflation which redistributes wealth to the least deserving — the property developers and the strong-arm unions.„' By all means let us enjoy the phoney peace while it lasts and take what comfort we can from the better economicnews. The Joint stock banks are still pouring out the money and at long last advances to industry are going up as well as to 'persons.' The most striking feature is the housing boom. The local authorities are now on the move as well as private developers. Housing orders are up by 25 per cent compared with the monthly average in the second quarter of 1971. This follows upon the big increase in house improvement grants in the first six months of the year which are more than 60 per cent above those of the first half of 1971. A housing boom is happily spread around many trades and many manufacturers of household equipment. Bricks and cement follow on and Mr Julian Amery, the Minister for Housing and Construction, was able to say last month that "brick production is at last catching up with the housing boom."
Looking at the economic charts, the most encouraging is that for unemployment and unfilled vacancies. The unemployment line is turning down and the unfilled vacancies line is turning up. The pincer movement we have been waiting for so long has really begun. The latest quarterly survey of the CBI — after the ' float ' but before the dock strike — is mildly bullish. The companies reporting are fairly optimistic about output and exports. The capital goods producers are still depressed but less so than for some time. The prospect for investment has at last improved. Projected spending on plant and machinery is the highest since 1968-69 and up to the peak of 1964. Anne Segall of the Investors Chronicle, who never misses anything, was right to remind us that a couple of weeks ago the OECD experts in Paris pointed out that once industrial confidence in the UK recovers, the followthrough to investment will be much faster than most commentators have allowed. Their argument was that over the past year much capital equipment had become technically obsolete, so that companies would come up against capacity shortages sooner than they expected. The continuing wage explosion, making managements keener than ever to use more machines and less men, reinforces this argument. But has industrial confidence really recovered?
Investors must not be too excited by good economic news. The upturn in the economy which is now well on the way can be held up at any time — as it is now — by strikes, go-slows and bloody-mindedness on the part of militant labour. At this moment the output and distribution of a wonderful new Jaguar model are at a standstill through a strike and the dockers are now threatening the livelihood of the china-clay workers, to say nothing of the tomato-growers in the Channel Islands and the people of Orkney and Shetland. Everyone is willing to try to solve the awkward problem of redundancy in the docks, so what is the need for the pressure of a senseless national strike?
If the joint efforts of the CBI and the TUC to provide some new conciliation machinery for wage disputes outside the Industrial Relations Act come to nothing but an easement for wage inflation no foreign or multi-national company will want to invest in industrial Britain and British investors will obviously be wise to put their capital outside Britain. A sign of the times is the advertisement this week of an issue of 7,200,000 shares of El. (4,000,000 applied for firm) of the Sizewell Investment Trust formed to invest in European equities. This follows on the HoareGovett European trust, the Rothschild European trust (which now stands at a premium of 17i) and four other Eurotrusts. An alternative attraction for investors will be the equities of investment trusts which have over 40 per cent of their portfolios committed to US companies.
While the phoney peace lasts the market in British industrial shares may well continue to advance, for there are many companies whose profits through improved efficiency and productivity will be recording rises of up to 20 per cent or more. But this will mark the recovery from economic stagnation. For the future the wage inflation will be eating into profits. Between 1963 and 1971 the income from employment (salaries as well as wages) rose by 84 per cent but company income from gross trading profits by only 41 per cent. So, if the wage inflation goes on, investors must expect the workers to do more than twice as well out of it as the holders of equity shares. And the worst sufferers will be the pensioners and the workers who are not blessed with strong-arm unions.
In the Sunday Times, Mr Harold Wilson propounded his own cure for inflation, which is well worth studying. He wants to see the Government, the TUC and the CBI sit down each year to estimate the likely increase in the national income, which he calls the National Dividend, and agree upon its allocation between public expenditure (including the social services) and private expenditure (through incomes and the tax system). If total claims exceed the National Dividend he would extend the pay-roll tax system, increasing the pay-roll tax in 'congested areas.' To quote: "By increasing the marginal cost of the wage-bill this system could also provide a disincentive to over-expensive employers." In other words, men must be thrown out of work in profitable 'congested areas.' This is a fine lesson for the greedy trade unions. They cannot have it both ways. Someone must suffer for an excessive, insupportable and job-destroying wage explosion.
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