In the City
Flowing uphill
Tony Rudd
If the outlook for the economy is so grisly why is it that share prices are going up? This is the simple conundrum which faces the investor today. Either the market has got it wrong or things are nothing like as bad as they seem.
Perhaps the answer lies in the difference between various parts of the economy today. So much depends on where you stand. Clearly if you are one of that bunch of distinguished chief executives and chairmen of large leading companies who signed a joint letter to The Times last week encouraging the Government to stick to their policy of disinflation, there are compensations in the present situation. For they are managing to use the difficulties which afflict us all to the advantage of the businesses which they are running. They are holding down labour costs and imposing a certain degree of labour discipline. They are managing to screw out of their turgid empires a long-awaited increase in productivity. They feel that if economic conditions are suddenly alleviated by a reflation (which anyhow will push up prices much more than it will output) the gains of the past will be dissipated and those of the future will be unrealised. The inherent assumption behind all this is that it is only the extreme nastiness of the economic climate that is keeping our collective nose anywhere near the whirling grindstone.
However, this attitude is not to be dismissed, because some of the industrial results which we are now seeing bear out the thesis. The half-year figures for Courtaulds, for example, which were announced a week ago showed a profit before tax of £20.5 million, which was a very sizeable increase indeed of £2.8 million over the comparable period in the previous year. This was a reflection of the tough tactics used by the company in pulling its ailing UK businesses round to break even. This same sort of exercise has undoubtedly been going on in other major companies and it is this measure of recovery and of the first fruits of reorganisation now discernible that is encouraging market opinion.
Some observers would go on to say that this all goes to show that Mrs Thatcher has after all got it right and that the medicine will prove to have been good for us. Good for some, might be the answer. For what is tolerable in a very large company, particularly one with substantial overseas interests, where continuing profitability can cushion the difficulties experienced at home and, even more important, where the basic financial strength of the organisation can see it through a period of retrenchment, can still spell ruin for a smaller organisation without these strengths. In this category must be put the large proportion of British industry, operating as it does in relatively small units often acting as a sub-contractor to the end producer. Many of these business have now become desperately short of cash. In the opinion of one leading firm of accountants who have a large number of such business on their books, the next few months are going to prove extremely difficult. Many have been hanging on for Christmas as it were, hoping that the New Year will bring an alleviation of the present dire circumstances. But if this doesn't happen then the tax due in the New Year, and particularly the VAT which will be payable then, could prove the last straw which breaks the camel's back. The impact of VAT this winter will be significant; when it's first collected many businesses incorporate these extra receipts into their cash flow as though they actually belong to the company, so that when it comes to paying the VAT out again they are, as it were, faced with a gigantic sales tax for which no provision has been made; more liquidations are likely to be precipitated by this factor than any other during months to come.
Overall and leaving aside anecdotal evidence, either of a relatively favourable kind from the big companies or of the desperately unfavourable variety from the smaller businesses, the conclusion is inescapable: this recession has not been good for industry. The fact that productivity is rising is not a sufficient compensation for what has happened. Industrial investment has slumped throughout this business cycle. In a whole series of vital industries not only will there be less capacity available to the economy when demand recovers (meaning that imports will rise willy-nilly), the actual quality of the productive process will in comparative terms be even further behind that of our international competitors who have gone on investing during these difficult years.
The point about reflation, which is the policy recommended urgently by the National Institute for Ecomomic and Social Research in their latest bulletin published last week, is that industrialists will only invest if they can see effective demand coming through from which they can earn the return on the investment which they should be making now. A shrinking industrial base may indeed be profitable for certain units within it but in terms of society as whole and its needs both as supplier and consumer what may be good for Courtaulds may well not be right for the rest of the economy. Significantly, even this fact may be recognised in what is happening in the stock market. For the pace there has been made by the shares of certain leading companies which are in the category mentioned here: namely of those doing untypically well. The larger body of quoted shares have not been going up in price but have merely been moving sideways. The underlying trend of this market is still very problematical. There is little underlying strength as yet. It could go either way and will probably end up by doing exactly that: moving up before Christmas and then coming back quite sharply in the New Year.
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