In the City
Going nowhere
Tony Rudd
The fact is that the experts can't really tell us where this economy is going. A month or two ago everybody was doomladen, and the prospect for 1982 and even 1983 looked desperate. Then some perceived a patch of blue in the sky; it was reported that the atmosphere at the CBI conference this year was much more 'hopeful' than last year and that the 'industry is leaner, fitter and healthier' school was in the ascendant. We also had the view put round that, although America's economy has clearly fallen off the edge of a cliff, this wouldn't affect the UK all that amount because Europe, to which a large and increased volume of our trade now goes will, for various reasons, be relatively sheltered from the depression from across the Atlantic. Furthermore, domestically, we appeared now to have got into a virtuous cycle again in terms of interest rates and the exchange rate; because American interest rates are now falling, ours can decline at a slightly lesser rate with a consequent healthy upwards push being given to the sterling exchange rate and thus fulfilling one of Mrs Thatcher's cherished antiinflation objectives.
As a result of all this, the stock market has been behaving better, interest rates have been falling and gilts are once again an instrument out of which to make money. All well and good. But no sooner have the first rays of sunshine illuminated our gloom than some more cloud comes along to eclipse them. We hear that industry is not on the whole recovering its poise. The CBI's latest survey of business confidence has not produced anything but the gloomiest of pictures. And although there are pieces of individual good news still to be found in specific areas, to wit, the apparent likelihood of a substantial order for British Aerospace for training aircraft for the US Navy, the overall volume of business for industry in this country is still far too low and shows few signs of rising. Stocks are still being run down. Labour is still being shed. These underlying trends which are not satisfactory are also reflected in the underlying trends in the markets. The movements in the stock market during the past few weeks have been indeterminate. Prices have swung first one way then the Other. Except for the excitement generated by the two new issues, Cable & Wireless and Exco, little real progress has been made. One leading technical analyst has commented that what has really been happening has been the transfer of shares from strong to weak hands, meaning that, on balance, long term investors have been selling to Speculators. It is difficult to pin down evidence for this kind of generalisation but it is true to say that most commentators agree that a market that is getting nowhere, is sooner or later going to burst out of its narrowing trading range decisively, one way or the other. And the bets are that when this 'breakout' does in fact occur it will be downwards.
If that is correct it will of course produce what is a fairly unusual situation, namely that equity.prices will be falling whilst gilts will be rising. This would be classic depression stuff. For usually the two go together with falling interest rates helping sentiment improve in equity markets. They only go in opposite directions when the economic background is so poor that despite a fall in interest rates conditions are still deteriorating for industry. Classically this is what happened in the early Thirties when interest rates fell through the floor but took the equity market with them. Those were the days when businessmen couldn't make money even though it was available in abundance at 2 per cent. The same point is made by many in business today that, although they may soon be able to borrow at say 12 per cent, which is extraordinarily low by the standards of the last two years, they still won't be able to make a profit and it's no use borrowing if the money can't be used to earn a return above its cost.
It is the prospect of this situation arising that is making the markets so difficult to read. But there is another factor complicating the scene too. Our interest rates are only being allowed to fall now because American interest rates are declining. Thus the widespread expectation at the moment is that, because the outlook is so grim in the US, interest rates there will go on falling way down into single figures with a huge gain to come in the bond market. But even here there are doubts. It is now evident that US economic policy has got into exactly the same set of difficulties that the UK had reached when the present administration was elected. Contrary to the confident expectations of the US administration that they would avoid all Mrs Thatcher's mistakes, they appear to have followed them with an uncanny accuracy, the only difference being the scale — which, in their case, is awesome. For the details we are indebted to the young Mr Stockman, who was in on the planning stages of Reaganomics and has revealed all in the Atlantic Monthly. Anyhow, this being the case, it may well be that the inflation which has, perversely, been well preserved in the US economy during this past year will prevent in 1982 and 1983 that long-awaited decline in interest rates and instead will condemn the Americans to exactly the same kind of irritating and unhealthy combination that we have been experiencing here, namely of a flagging economy unable to shake off persistent inflationary pressures. That produces the worst of both worlds, as we know to our cost. If this is what is in prospect, then the current decline in interest rates is not a phenomenon with which we are going to live for very long and the bonds which investors are now tucking away will after all turn out to be sardines for trading rather than eating.
Previous page
