THE ECONOMY
Going round the bend on the curve
JOCK BRUCE-GARDYNE
At home the National Institute is still forecasting doom and disaster, with a record balance of payments deficit, stagna- tion, a rising Budget deficit, and accelerat- ing inflation. The Confederation of British Industry reports that its members still see no sign of an end to the 'pause' in economic growth.
Yet something has changed in my ab- sence. The stock market has come to life again. Trifles like the gloomy predictions from the National Institute and the CBI, which a month ago would have been called in evidence to explain a tumbling Ff index, are now brushed aside as irrelevances.
As always, a variety of more or less plausible explanations is on offer. There was that Mori poll revealing that the Tories and Labour are back to level pegging. There is the expectation of an enthusiastic debut for the TSB. There is also the calculation that the Government will be pulling out all the stops to get British Gas away with a following wind behind it in November. But above all, it seems, there is a belief that Opec has 'got its act together' once more, and that oil prices are set to consolidate in the high teens.
On the face of it this last — and apparently crucial contribution to stock market confidence — is doubly paradoxic- al. It is paradoxical since all we have from Opec is a three months' commitment which the beleaguered cartel has produced on numerous occasions in the recent past, to a chorus of hollow laughter. It is also para- doxical since we were told but a few short months ago that nothing could be better for the world economy than a collapse in oil prices, leading to growth, price stabil- ity, and human happiness.
Alas! It was not to be. The Sheikhs of Araby, seeing their revenues disappearing, vanished from the market for everything from desalination plants to grouse moors; and all those pennies saved on petrol did not find their way into alternative purch- ases as we had been told they would. Furthermore the oil companies of the West looked into the abyss and did not find it to their liking, while the US banking author- ities started to sweat once more about all those loans to Mexico and their domestic oil producers, and our own analysts scared themselves rigid with calculations of the impact of $10 per barrel oil on our balance of payments.
So the time had come to talk up the price of oil. This time, it was generally agreed, Opec meant business. The Russians, who know a thing or two about marketing their commodities in the West, would not rock the boat. The Norwegians are playing ball. Even the Government, which publicly con- tinues to have no patience with price- rigging arrangements for the benefit of Opec, is reckoned to be privately disillu- sioned with the free fall in its North Sea earnings (and is not Mrs Thatcher off to pay a call in Oslo?). Cheap oil, in other words, has been a frost, and one and all have made up their minds to get the price back to a 'sensible' $18, or thereabouts, and keep it there.
Fortunately there is possibly a rather more substantial reason than this for sym- pathising with the Stock Market's indiffer- ence to the despondency of the sooth- sayers. And that is that the really fairly dramatic changes in the parities of the dollar, the deutschemark and the yen since the 1985 'Plaza Agreement' do seem to be beginning to have the desired effect.
Next week I am off on a brief visit to Washington, where I shall assuredly be told that things cannot go on as they are, with the Japanese and Germans piling up ever more massive trade surpluses at the expense of the United States, and stub- bornly refusing to do the decent thing and cut their interest rates. Things look very differently in Bonn and Tokyo: and under- standably so. For it is part of the cussed- ness of the laws of mathematics that if the value of a currency rises sharply the pur- veyors of that currency enjoy (or perhaps one should say in this context suffer) a huge increase in their trade surpluses, for the very simple reason that their imports cost a lot less, and their exports are worth a lot more. But only for a time, since their exporters will soon be either priced out of their markets, or forced into losses to try to maintain their market shares, just as the cheapening of imports into their own back- yards put them on the rack at home. What happened to us in 1980-81, in fact.
This is what is known in the jargon as the `J curve'. Now it is true that when we used to devalue the pound in the days of fixed exchange rates the down-stroke of the was all too obvious, but the curl at the end never seemed to materialise. The US authorities evidently reckon that's what's happening to them. But there is a vital ingredient in the US experience which was missing when we tried to restore competi- tiveness by cutting our exchange rate. That ingredient is domestic price stability. We never seemed to reach the bend in the 1' because the competitive advantage which should have flowed from devaluation was invariably wiped out by inflation (and incidentally that could happen to us again if we harken to the insistent calls for further cuts in the cost of borrowed money). But — not least, no doubt, because the Japanese obligingly recycle their surplus earnings straight back into dollars — there are no signs of this happening in the United States. Prices, there, are still as flat as a pancake.
Small wonder, therefore, that the Japanese and Germans are complaining with increasing stridency that their export industries are in dead trouble. Certainly there is an element of exaggeration in this, for external consumption. But there is some truth in it as well. Which is hard cheese on the Germans and the Japanese. But is that not what the correction of trade imbalances is supp-osed to be all about?
Admittedly it is happening far too slowly for the comfort of all those senators and congressmen facing re-election in Novem- ber. But then politicians always suffer from impatience. What matters, surely, is that for all the sound and thunder about protec- tionism in the US President Reagan has managed to hold the line with not much more than an offer of cut-price grain sales to the Soviet Union. And those cut-price grain sales might yet force the equally culpable European Community to face up, at long last, to the need to impose some discipline upon its agricultural budget. Or is that, like Lord Lundy's grandma's wish that she were young and spry to give him that for which to cry, forlorn?
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