MONEY The Institute's crystal ball

NICHOLAS DAVENPORT

hree weeks ago I was venturing to say that

e better export news gave some en- -ouragement to the view that the then rally.. n equity shares could or should be ex- ended. Along came the Pergamon affair to nock it on the head and now another low comes from a pessimistic bulletin put ut by the National Institute of Economic nd Social Research.

:IS

These worthy independent economists be- eve that the recent recovery in the national utput will taper off next year. Even this ear it is not likely to be 'all that much'. ndeed, they put the rate of growth through he year--that is, between the fourth quarter f 1968 and the fourth quarter of 1969- t only 1.9 per cent, and looking ahead to e fourth quarter of 1970, at only 1.2 per nt. This implies that unemployment will se during 1970 to reach 700,000 or possibly 150,000 by the end of the year (this Mr enk ins strongly denies). They conclude that ome reflationary measures will be needed in e next budget. This will delight the heart f the Prime Minister if he is contemplating n autumn election in 1970, and may bring ome reassurance to a Stock Exchange which as become as dull as the weather.

It has been a constant theme in this page o stress the dangers of an over-kill if the oney squeeze and the fiscal deflationary easures, which have already created a nni-recession, are carried too far. But in ome respects I think the National Institute been over-optimistic. For example, it urely underestimates the likely rise in ages and salaries in the second half of 969 and the first half of 1970. A rise in nemployment or a slowing down of the Ise in prices has never yet held the trade ions in check. There were no signs at the rades Union Congress that they intended o exercise more restraint in making wage aims. Indeed, some people fear a wage xplosion before- long. The table below hows the index record since 1965 (1963 ing 100). It suggests that the rise in wage ates always keeps just ahead of the rise

Il prices and that the unions rely on over- ime working to give the real boost to their

eekly earnings. If the same pattern pre- ails up to March next I cannot see the hancellor introducing much reflation in his udget, except possibly for the trades which Ave been specially depressed.

A curious feature of the National Insti- ute's guesswork is that they doubt whether eflation could be allowed in the budget un- ss steps are taken at the same time to in- itiate the balance of payments. They even uggest that there might be a case for not my retaining but tightening up the import eposit scheme. Now this scheme comes o an end at the end of the year and while he Financial Secretary, Mr Harold Lever, efused to give an undertaking in the Com- ons debate that it would never be repeated,

✓ Jenkins's letter of intent to the IMF did

✓ that the current restrictions on travel expenditure and import deposits would be abolished as soon as the balance of pay- ments allowed. The figures to be published this week are expected to show that we arrived at a surplus on current account and capital account in the second quarter. Although Mr Jenkins will not realise the £300 million surplus he forecast in the financial year to March, the improvement in the balance of payments on current account will hardly justify the retention of the imports deposit scheme.

The accuracy or otherwise of the National Institute's forecast will depend on the out-turn of world trade. They have re- vised upwards their estimate of the growth of world trade in 1969—from 10 per cent to 11# per cent—and they are taking a slightly more optimistic view of the under- lying competitiveness of British exports, but they anticipate a slower rate of growth in 1970, by which time the stimulating effect of our own devaluation will have worked itself out. If the Deutsche Mark is not up-valued in the autumn and the new German government resorts to deflation of domestic demand they fear that some of the smaller continental countries will find themselves in difficulties. Nevertheless, they see world trade still ex- panding in 1970—perhaps by as much as 7+ per cent—and commodity prices not likely to fall much below their present high level. The coming release of the special drawing rights of the IMF is another fact which may support that reassuring view.

The institutional investor, if he can wade through this economist's exercise in statis- tical guesswork may not feel very much wiser at the end of it all. In view of the sluggish growth in consumer expenditures which is forecast he will not be encouraged to jump into consumer trade shares. Nor into building trade shares in view of the 5 per cent drop anticipated in private house building and 2.9 per cent in public building. Nor do capital goods offer much investment joy, seeing that the Institute has revised its estimate of growth in total in- vestment down from 4 per cent to under 2+ per cent this year and under 21 per cent next. So the investor comes back to the equities of the well-managed companies pre- dominant in the export trade, not forgetting the international groups in oil and metals, the shares of which had suffered some spec- tacular falls especially in Australia. It would greatly assist us all if the National Insti- tute were to make a special study next time of the Australian position in world trade. It may be significant that the capital in- flow into Australia has fallen from $A92 mil- lion a month in 1968/69 to SA 10 million this summer. This may be very helpful for our own balance of payments but for little else.

We are left puzzling over the Institute's interpretation of the £10 million a month unrecorded exports. Does this merely re- duce the favourable 'balancing item' or does

1965

1966--

1967 1968 1969 Weekly wage rates 109.2 114.4 118.5 126.3 131.9 (2nd quarter) Weekly earnings 115.1 122.5 126.6 136.8 145.7 (1st quarterl Retail prices 108.2 112.4 115.2 120.7 127.2 (2nd quarter) it mean that our ability to repay our short- term debts has been increased? The In- stitute does not give a definite answer. This is a pity, for the City, which would never question the honesty of Board of Trade official*, Us now thrown back into feelings of doubt about our balance of payments posi- tion. It may be that what the Institute is trying toTdil us is to buy government bonds and forget the rest.