THE ECONOMY

And now for a year on auto-pilot

JOCK BRUCE-GARDYNE

As I recall, 1988 was to be the Year of the Crash. As the great bull market of the 1980s surged on towards its apogee a stream of unsuccessful Wall Street punters handsomely recouped their losses with plausible descriptions of the great slump which was to pole-axe the globe in the year now started. The Saudis, by threatening to pull their funds en bloc from Wall Street, were billed to hold the glorious West in fee, and drive the incumbent US President into a corner, with threats of nuclear weaponry to curdle the blood.

Well, now we know. The crash occurred in 1987: and it wasn't the Arabs, whose economic clout had in any case shrunk with the price of oil, who lit the fuse. It was a good old-fashioned Wall Street slump.

Those who were predicting that Japan was where the earthquake would strike, even days before the actual crack, have so far fared no better than the fiction-writers. Wall Street was grim, London worse, and Australia suicidal. The Orientals seemed to take it in their stride.

But then so have we all — so far. For those of us old enough to remember such events, it's been a little reminiscent of the `phony war' of 1939. War was declared, and immediately the sirens sounded. We dashed off to the shelters, grasping gas masks, and waited for the bombs to fall. They didn't. Slowly we emerged, looking sheepish. Similarly on 'Black Monday'.

The soothsayers promptly took up their blue pencils, and slashed back their esti- mates of world trade and growth in 1988. The 'wealth effect' of cascading stock market values was to ripple round the planet.

And the watching world said `pfui'. The US economy continued to outpace all predictions, with manufacturing output bumping harder against the ceilings of capacity than it had since 1984, and unem- ployment still falling. The Japanese seemed to be embarked upon the spending spree at home that all their trading part- ners had so long enjoined upon them. At home the CBI was almost clinically euphoric — and with industrial production found to be accelerating every time the Department of Industry felt its pulse, who could blame it? Only the Germans were a bit morose: but then they like it that way. Admittedly the US trade returns grew monthly more horrendous, and the dollar was sicklied o'er with the pale cast of thought — or rather lack of it. But who, in Washington, gives a damn about the dollar or the trade returns when it's an election year?

In 1940 the phony war was followed swiftly by the real thing. And, ten years before, the 1929 stock market crash had been followed, after some months of con- solidation and relief (like now), by re- sumed collapse which ushered in the great depression. The precedents offer little comfort.

`The danger we now face', according to our Chancellor, 'is a dollar undershoot . . .

leading to inflationary pressures in the United States; a further dislocation in world trade; and a dampening effect on confidence and hence on economic activity in the world.' Solemn words indeed, but hang on a moment. A plunging dollar dislocates world trade by pricing imports out of the US economy and pricing Amer- ican exports into the markets of competi- tors. But not if it leads to inflationary pressures in the US; as we, of all countries, should know from bitter experience.

The real fears for 1988 — and they are not to be underestimated — are surely otherwise. The first is that a second major crack on Wall Street really will scare the US Administration and the Congress into overkill: a substantial tax rise, and a substantial rise in US interest rates, just when US consumers have finally been converted into savers anyway. The second is the old enemy, protectionism. The slither in the dollar ought logically to put protection pressures at rest, but in a US election year logic is a poor signpost.

The third hazard is indeed inflation: but not just American inflation, the contagious variety. In the immediate aftermath of the stock market slump the Chancellor was going round assuring us that that at least was one anxiety we could now forget about. When he paid his pre-Christmas visit to the Commons Treasury Select Committee he sounded, I thought, a good deal more cautious on that score — as well he might.

For his part Mr Lawson is clearly going to carry on the good work in 1988 of telling other people what to do; first and fore- most, of course, those dozy idle Yankees, who can still think of nothing better than to swear to God they like the dollar as it is. But as the US Secretary of State, George Shultz, made brutally clear in Brussels the other day, Uncle Sam knows just what to do with advice from this or any other quarter. The dollar was America's con- cern. And would America's candid friends abroad kindly keep their 'cotton-picking hands off it'? So it is much to be feared that Mr Lawson will be told to go pick on something or someone else.

The Germans, for example. What they ought to be doing now, Mr Lawson told the Treasury Committee, is tackling the sub- sidies they (and we, alas!) shell out to their most inefficient industries, such as coal and agriculture.

Which brings us to the European Com- munity. For 1988 is yet another 'make or break year' for the EEC (like all the ones that have gone before it). The strategy is clear enough. What ought to happen is a simple message to the Germans: that if, as the wealthiest economic power in Western Europe, they want to go on subsidising marginal agricultural production, their own taxpayers can foot the bill. You have to be a cock-eyed optimist to think that that will be the outcome.

So where do we look for cheer as the New Year dawns? Well, we could take some modest comfort from the message of the three-and-thirty world economists re- leased just before Christmas. The only way to avoid a world depression, it seems, is to get the dollar down to 120 yen and 1.4 deutschmark or thereabouts, to refinance the debts of Latin America, and to get the `newly industrialised countries' to open up their markets (to imports from Uncle Sam, that is). As the Financial Times remarked, `And we all believe in motherhood and apple pie.' But then we also remember the awful warnings of the 364 economists in 1981. If we managed to survive in 1981, there is at least an outside chance that the world will survive in 1988. It had better. For it is likely to be on auto-pilot until the Americans have contrived to find a presi- dent, and maybe none the worse for that.