Companies Feel the Squeeze

INDUSTRY

By JOHN BULL

ONLY twice in the past decade has the Govern- ment kicked the unemployment figures sharply upwards. Mr Selwyn Lloyd did it. That was five years ago this week. The other occasion, as the Labour party was quick to point out, was September 1957 with Mr Thorneycroft at No. 11. It is in this tradition that Mr Wilson now appears to be working.

There are differences, though. The Selective Employment Tax is a new device. The structure of the economy has altered. Events in the economic field provide no exception, thank good- ness, to the proposition that history does not repeat itself. But as far as industry is concerned, the message is the same: tough times lie ahead. The present Government's hope is that in spite of this businessmen will not be scared into reducing, or even shelving, their capital investment plans; and also that the `fun' will not be taken out of exporting. Unfortunately, a look at what happened in 1957 and in 1961 does not provide much hope on this score.

By the time Mr Thorneycroft announced his emergency measures in 1957, investment in new plant by manufacturers had already begun to ease off. But in 1958 the downturn gathered pace. And the bottom of the trough was not reached until the autumn of 1959. In 1961 capital invest- ment turned down again, almost as Mr Selwyn Lloyd spoke. The fall continued until Christmas 1962. Exports declined for nine months after Mr Thorneycroft, but only for six months or so after Mr Selwyn Lloyd. This is crude economic analysis, but it is worth noting.

• The next step is to look at the special nature of the 1966 credit squeeze. For the first time com- pany cash resources are being subjected to really severe pressure. One cause is the time-lag be- tween payment of the SET in the autumn and the receipt of the first refunds next Spring. At the same time, the Government is making sure that the banks do not help industry out by extending overdraft facilities. In any case the corporation tax system, by making dividends more expensive to pay, has already reduced corporate spending power. Of course companies can borrow on the open market. But rights issues are no longer the convenient operation they once were. The deben- ture market, too, is far from easy with yields virtually on the 8 per cent mark.

On this score four sectors were shown by the June CBI inquiry into industrial trends to be particularly vulnerable : building materials; cloth- ing, footwear and leather; textiles; and electrical capital goods. Their names come as no surprise "because all have to finance a high level of stocks or work in progress and none can claim a high

level of exports as reason for extra accommoda- tion at their banks.

Suppliers to the builders and constructors have, of course, been depressed for months. As soon as private house starts tailed off, the brick makers were in troubje. And if progress in the public sector follows suit then the cement makers will find that their stocks rise alarmingly. A month ago the chairman of the largest cement manu- facturer of all, Associated Portland Cement, was saying that the small drop in deliveries over the first half of the year should be made good by December 31. Now it does not look so likely. Associated Portland will survive, though: it is the smaller units which, as always, will have the hardest time.

The clothing trade also told the CBI that finance was a particular worry. This points a finger straight at the man-made fibre producers and processors further back down the manufac- turing pipeline. And in turn this means that two of Britain's giant groups, Courtaulds and ICI, face an unpleasant year. Again, both have been under pressure for some months. The big groups are all laying down a great deal of new capacity at the moment. Courtaulds is going heavily into nylon. Research and development costs total £1 million per annum. ICI for its part is determined that the share of the nylon market held by its fibres division should not be reduced. Meanwhile the American fibre com- panies in Europe are pressing ahead. Thus a major reduction in demand this winter could do a great deal of damage to profits. But this is not the end of the story. Courtaulds and ICI are themselves not particularly flush with funds.

Courtaulds, for instance, needs about £35 mil- lion a year to finance its expansion programme while retained profits look like providing no more than about £25 million annually, and now perhaps rather less. And if ICI's results for the rest of the year turn out to be as dim as they were in the first three months, then part of the dividend will have to come from reserves. What happens in these circumstances is quite simple: capital spending plans are reduced. Here, then, is an example of an almost mechanical link between a credit squeeze and capital investment. There is also the psychological impact of this week's measures to consider.

Much the most reliable guide to the state of business confidence is the experience of the machine tool industry over the past few months. The overall impression is of an industry which is just beginning to turn down from a very high level of order intake. The decline over the first four months of the year is small—some 2 per cent. But what is more alarming is the way orders

from overseas have fallen off badly, 17 per cent down in the January-April period. On the other hand the industry has plenty of work in hand and nothing the Government does now can have much impact before next summer.

The interest of the machine tool sector at this juncture also lies in the fact that it provides an example of where a reduction in home deinand can be directly beneficial to exports. If you ask a machine tool manufacturer what holds him back most at the moment, he will almost certainly say, `lack of skilled labour.' And if you go on to ask why his export orders are not what they were he will say, `poor delivery, times.' The two explanations are linked. If home demand is reduced then delivery times can be substantially improved. But is it worthwhile holding back re-equipment at home for the sake of a few more machine tool orders?

But it is in the motor industry that the relation between exports and the home market is really crucial. In fact the motor industry has kept going remarkably well right through 1964, 1965 and the first half of 1966 at a high level of production. Its success indeed has been a sure sign that the Government has not been able to take the steam out of consumer spending. And as the first six months of the year are the important ones, out- put figures for 1966 are bound to be quite respec- table, showing at worst perhaps a 5 per cent to 10 per cent decline.

The motor industry remains sensitive to govern- ment action, however. Restrictions on hire pur- chase in 1960 reduced home demand by a quarter. But what one looks for above- all from the figures which plot home and export trends since 1956 is evidence that the latter can flour- ish when the home market is flat or depressed. Unfortunately there is not much encourage- ment to be had. There are periods when home sales have gone down while exports have risen, and vice versa. But never for more than six months and usually for about three months. Otherwise the trends are similar, with home de- mand the more volatile of the two. One can add doubts as to whether groups like BMC and Jaguar (soon to be joined) really have the right models for overseas markets. The Minis and 1100s are fine. But what about the middle range?

Finally, what are the prospeots for the suppliers of food, drink and tobacco? Normally in response either to a rise in price or to pressure upon wage packets, demand moves down to the cheaper end of each range in this sector. Volume offtake does not alter much, but total spending does. Even when unemployment figures rose sharply in 1958 and 1962, there was no decisive break in demand, just a wobble or two.

Looking at the picture as a whole, however, one returns to a single question : if holding back home demand will provide no help for exports (may even hinder them) and if the exercise can easily send spending on new plant plunging down again, what benefits does the policy have?

The answer is that there is an impact also upon imports of industrial materials. These infallibly decline when the Government hands out strong deflationary medicine at home. That is the pay- off. But is a depressingly negative approach to the problem of the visible balance of payrfients.

Meanwhile profit figures are not going to make pleasant reading. It is difficult enough to keep them moving up at the best of times. Rising costs, labour disputes, delays by one's suppliers, research, write-offs, all take their toll. But if de- mand begins to fail as well, then dividends are certainly going to be cut and some companies, famous names among them, will even move smartly into the red.