15 MARCH 1975, Page 27


Economic and market critique

Nicholas Davenport

The FT index of ordinary shares having reached 300, as I predicted, more than doubling itself in the space of two months, which is an amazing performance but understandable, as I have twice explained, it is now on the move towards 320 under the heady stimulant of cheap money. Bank rate has come down to 101/4 per cent — the peak was 13 per cent in November 1973 — and the clearing banks have reduced their lending rates to 11 per cent (Barclays to 103/4 per cent). The slide in money rates was started by the American Federal Reserve, which is subservient to the President's reflation policy, and has now spread to hairope, West Germany, Holland and Italy cutting their bank rates last week. At long last the businessman can breathe. Absurdly dear money was Stifling enterprise and holding up investment. Money is still too dear. Inflation will never be killed until it IS made cheap.

It now behoves wise investors to take another look at our inflation Which is still the businessman's greatest worry. While there are signs that world inflationary pressures are slackening, those in our Own disunited kingdom seem to be increasing. World commodity prices have now fallen by about 25 per cent from their 1974 peak levels. The disconcerting fact for Britain is that while the US and Germany feel that it is now safe for them to refiate it is clearly not safe for us to follow suit. The increase in our inflation is no longer due to world prices but to excessive spending and excessive wage settlements.

The wage rate index is not, of course, a correct measure of our wage cost inflation. Because of the consolidation of large threshold settlements during 1974 the yearOn-year wage wage rate increases look alarmingly large. Mr James Morrell, the economist of the Charterhouse Group, estimates that wage rates will show a 331/2 per cent rise, Year-on-year, in the first half of 1975 but that total wage and salary increases will come to about 25 per cent. Labour productivity gains are Still being achieved, because companies are managing with a lower Input of labour. Unit labour costs this year will rise, Mr Morrell thinks, by about 20 per cent. This broadly corresponds with the rise in British retail prices up to date but is a long way above the rise in the unit Costs of our competitors abroad, which is about 10 per cent. So the

prospects for our export trade are not good. Add to this price disadvantage the delivery delays, which are making us lose a lot of business in the Middle East, the export prospect can be written down as bad, in spite of the fact that the world trade recession may not last as long as seemed likely a few months ago.

The truth of the matter is that our powerful trade unions have been getting away with wage rate increases well above the retail price increases. They have been improving their standard of living while the national output has been declining. This is economic madness. It is also against the TUC guidelines of the social contract which are supposed to limit wage increases to the rises in the cost of living of the past twelve months, not to the anticipated rises of the next twelve months. The responsible ministers have warned the trade unions of the economic consequences of breaking these rules. Mr Healey had done so more than once. Mr Anthony Crosland on February 21 said that "two facts were indisputable: first, that excessive wage and salary settlements and rapidly rising prices were inextricably linked together; second, that in a competitive international world this week's excessive pay increases may be the first step towards next week's unemployment." Mr Roy Jenkins followed on the same lines on February 28, adding that the present level of inflation was "the biggest menace since Hitler." Finally Mr Reginald Prentice, with his homespun language, told the trade unions to stop 'welshing' on the social contract, which pace Mr Wilson, needed saying....

The Prime Minister has been conspicuous by his silence on the many settlements which have broken the social contract. Indeed, he appears to have abrogated responsibility for the consequences of our wage-cost inflation. He seems to be saying to himself: "Well, if the trade union fools won't learn from what my wise ministers tell them (excepting always that so-and-so Prentice) they must learn by suffering, that is, by unemployment. When it gets to the two million they will change their tune." He may, of course, be right. The builders once lodged a wage claim of nearly 100 per cent but so rapidly was unemployMent rising in the building trades that they settled for 171/2 per cent. Mr Wilson must therefore tell Mr Healey not to reflate in his April budget (apart from some relief to the very poor) but allow unemployment to take its course until the unions acquire more sense.

What must humiliate the prime minister — and what has infuriated the opposition — is that while the government is honouring its deal with the TUC by soaking the rich the members of the TUC are not honouring their side of the bargain by keeping to the social contract guide lines for wages. The rushing through Parliament of the vicious capital transfer tax which will destroy the soul of private enterprise in the small family business in trade or in farming, on which our free society has been built, is so alarming that one wonders that it has not killed the bull market on the Stock Exchange stone dead. But one must not forget first, that the institutional investor is not concerned with the small private business but with big business — and who knows but that the final outcome of our present revolutionary discontent will not be a corporate state divided between big business and the trade unions? — and secondly, that the private

investor remains convinced that Mrs Thatcher will eventually bring victory to the Conservative cause

and repeal all the wealth-confiscatory measures of a madly envious.

and muddled egalitarian ruling clique of doctrinaire clause four socialists.

The bull market is not sustained by any anticipation of an improvement in corporate profits this year but by relief that a total collapse has been avoided, that Mr Healey intervened in his last budget to ameliorate the liquidity crisis, that further financial help is coming from FFI, loans (thanks to Mr Lever) and by the fall in interest charges (thanks to the Federal Reserve Board) and that North Sea oil exploitation is at last to go ahead. If Mr Healey's next (April) budget recognises that the only stumbling block to recovery is the wage-cost inflation brought on jointly by the trade unions and by. excessive government borrowingthe market will remain content. But its bullishness would evaporate overnight if the referendum vote. went against the EEC, assuming that the Stock Exchange takes its cue, which it usually does, from a very fearful CBI.