In the City
Flaming June
Tony Rudd
Once again investors are left with an uneasy feeling in the middle of June that it might have been better to have sold in May and gone away. By so doing they would have missed part of the fall in the pound, quite a large drop in share prices, the continuing irritations of the civil servants' strike and the worst , midsummer weather known since the records were kept. The mood of City markets is notoriously fickle but it extraordinary how quickly the euphoria of the Easter period has evaporated.
The obvious culprit is the rise in interest rates. If there's one thing that we have learned during the last decade it is that prices (almost of anything) cannot survive rising interest rates; the absolute level doesn't seem to matter as much as the actual direction in which rates are moving. Even if they are very high but are coming down, people are encouraged; whatever their level, if they are moving up they are iiscouraged. But in this case there has been the added ingredient of disappointment; interest rates were expected to be falling at this point in the economic cycle and they are not. The easiest explanation is that the huge rise in interest rates in America which is the subject of international complaint has :mused our difficulties in London. There is some truth in this: a move as sharp as that xhich has happened in the United States is lound to affect all other international ;entres and particularly London. But this is iot the whole story.
A further factor is the new sensitivity vhich has emerged about the level of the aound. The general idea until very recently vas that it was too high for the economic :omfort of the country. Economists ex plained that as a result of our North Sea oil bonanza our currency had become overvalued and was in consequence 'crowding out' other forms of exports to the detriment of industry and thus of employment. The high pound was thought to be one of our problems. So when it became apparent a few weeks ago that we were to be delivered from the worst of this problem as the pound fell pretty sharply down to the $2 level and below, the experts in Whitehall should have been as pleased as the exporters north of Watford. But they weren't. A palpable nervousness became evident; the air of studied insouciance worn by certain Ministers made experienced observers of the scene immediately increase their forward cover. There's nothing so worrying as the assumed indifference of a British Minister in the face of a falling currency. Of course what has happened is that calculations about the future level of inflation indicate quite clearly that a substantial fall in the exchange value of the currency will inevitably mean sharply rising import prices and raw material costs which will very quickly feed through into higher prices everywhere. So, although we have probably seen the last of a $2.40 pound for some while, there is the general feeling that the Government will defend a rate at around $2 to the pound, not by direct intervention in the markets by the Bank of England but by the more indirect but all-pervading method of keeping interest rates sufficiently high to prevent all the loose balances from being sucked out to New York.
Then on top of this there is a purely domestic reason why interest rates are higher than they might be, namely the perennial problem of financing an overlarge budget deficit. This, as we all know, is the penalty of the Government's failure to bring public expenditure under any kind of control. Admittedly it has tried, but it has not succeeded. And currently the position is being made worse by the impact of the dispute with the civil servants and the consequent interruption to the flow of revenue. It is difficult to be precise about how much money is now caught up uncleared in the system but it must be sufficient to be making a real impact on the borrowing requirement.
Another unexpected and unwelcome event in the equation is the drop in the price of North Sea oil. There is every chance that the contribution to the Exchequer from this very impertant source is now going to be less than originally budgeted.
No wonder there was a feeling a week or so ago that MLR might well have to go up again before it resumed its downward path. But if the short-term outlook is not particularly bright there are now some influential voices saying that the medium to long term is not bright either. Noteworthy amongst these is the Bank of England whose recent observation that wages need to be kept practically unchanged in real terms for the next few years if this country is to have much chance of getting itself out of recession, was particularly depressing. For if that is our only hope we might as well give up, for it is all Lombard Street to a china orange that real wages won't be kept level for the next few years. Particularly if the whole burden of achieving such a miracle is to be left to companies in the private sector as the Bank of England, the experts in which must live in some other world than that inhabited by people who actually live and work in the private sector, suggests.
There may or may not be some special significance in these symptoms of so-called experts taking leave of their senses, or it could just be that this is a usual run-of-themill bit of nonsense. On the other hand it may be that first sign of a general crackingup, a kind of numbing of the senses which takes over when thinking people are confornted with insoluble problems. There is certainly a dawning realisation that the UK's economic ills may be incurable, at least in terms of the kinds of cure which have been applied recently. This is a difficult phenomenon from that of Conservative Cabinet Ministers disagreeing with the Prime Minister; they still have hope but they disagree with Mrs Thatcher about the means. They are still convinced, though, that there is light at the end of the tunnel. The people who are beginning to disagree with this government on a much more fundamental basis are those who don't think we are going through a tunnel at all but that we are just digging down a hole; they think that the only light is behind us and the only way to get there is to climb back out. As the date of the next election approaches, this school is going to become more vocal.
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