In the City
A black hole
Tony Rudd
Is a catastrophe shortly to overwhelm large sections of British manufacturing industry? This is a question which some fund managers are now asking themselves quite seriously. One of them, John Cunn- ingham (now the chairman of Investment Research up in Cambridge), put it aptly when he said to me last week, 'Nobody in the City wants to know about engineering or run-of-the-mill manufacturing com- panies any more; they just run away from them.' They can be seen doing so further- more by the way the shares of such com- panies are currently behaving on the stock market. Although the overall level of the market has been maintained (admittedly with some weakening during the last week) this has disguised the very different perfor- mances of shares which are in the fashion and those which are not. In the former category we have the ever-popular defence, electrical, telecommunications and elec- tronic businesses, with GEC at their proud head; all doing reasonably well. But at the other end of the scale once-famous com- panies like Tube Investments, Turner and Newell and John Brown are languishing.
The extent of the falls in the engineering sector is becoming a real source of worry. If they foretell events that are about to occur (and the Stock Exchange has quite a good record for indicating what is to happen in about 18 months' time) then there is serious trouble afoot. The shares of Tube In- vestments are in fact lower now than they were at the bottom of the market in 1974-5. They are an engineering conglomerate whose shares almost invariably found a place in large, well-managed portfolios ten years ago; they were one of the fundamen- tal investments to be found in any list, like Marks and Spencer or Boots. Guest Keen, which has not been faring quite so badly but has still been a very dull market, is one of the 'blue chip' investments of this coun- try, to be set alongside ICI. John Brown was actually many people's favourite 'growth stock' a few years ago; now the price of its shares have fallen into a chasm. Meanwhile the shares of the smaller engineering companies, albeit businesses of quality, with sound management and ex- cellent products, are, so far as the majority is concerned, right out of favour.
The impact of all this has been very noticeable in the lack-lustre performance of many of the high-yielding unit trusts; it has also hit some of the so-called 'recovery' trusts. These sorts of trust invariably invest in 'out of fashion' shares and what they hope is that they have hit the bottom of the business cycle so that they can benefit as in- dustry re-expands. This time round they have bought the depressed stocks only to find that a year later they have been even more depressed and, consequently, still lower in price. Hoping to see what a broker in the North, surrounded by all this trouble, thought, I spoke last week to a Manchester firm; the partner in charge of investment policy told me that they invariably advised their clients in times of depression to buy engineering shares on the cheap, but that this time round they were breaking their rule, for the very simple reason that they no longer expected the so-called recovery stocks to recover.
That's the nub of it. What the market is saying is that if this recession goes on unremittingly for the rest of the year and in- to next, it will be the death of many fine businesses. They just won't be able to cut back their costs sufficiently far to survive. Nor will their banks be able to continue to support balance sheets which will have become thoroughly unbalanced.
At the moment there are clearly two schools of thought about all this. On the one hand the Government and many of its quarters, both expert and inexpert, take the view that British industry must recover under its own steam. The only help that they are willing to give is to push interest rates down (hopefully). As for the rest of it, the strong must survive and the weak, if necessary, go to the wall. The alternative view, led by the CBI but supported by many others, is that the problem can't just be left to solve itself. It is too big. Probably the real difficulty lies in the timing problem.
Ultimately it has to be accepted that Britain must have much more of its assets invested in high-productivity industries based on new technology. But the shift from the old industries has to be reasonably orderly, otherwise there is huge structural unemployment. And this today is the risk that we seem to face. For the pace at which much of British engineering in particular is disappearing is far too fast for any reasonable growth rate in the new industries to balance. Further- more, as the latter are likely to employ less per pound sterling of investment than the former, the problem of unemployment is anyhow severe during this whole process.
What we now have to appreciate, though, is that the speed of deterioration Is gathering pace at a frightening rate. Whole industries, steel, heavy engineering, forg- ing, machine tools (what is left of that in- dustry) and now the light engineering in- dustries are threatened. The danger is not so much from the domino effect of failure but of what might be termed the 'house demoli- tion' scenario, in which the structure falls to the bottom of the building and the whole thing collapses floor upon floor more or less instantaneously. If this actually hap- pened here, unemployment in this country could jump by over a million in a frighten- ingly short space of time. The big figure, as they say in the City, could quite quickly 80 from a three to a four. And even that might not be the end.
If this actually happened. there would be trouble all round. Revenue flowing into the Exchequer would fall as the blight spread, while the cost of unemployment pay would suddenly rise. Eventually there could even be some social trouble. So far the unem- ployed, cushioned by the participation of many of them in the black economy and by some degree of welfare, have been remarkably docile; a sudden upward jump in the figure could at last spell a little more trouble. Furthermore this would not be transient unemployment; it would be of the lasting variety.
Britain needs to change; that is unde- niable, but not as a result of much of the Midlands and the North being turned into a black hole. One only hopes that this loom- ing problem will not be dismissed just because to accept its existence runs counter to current economic philosophy. The danger does not necessarily spring from the Government's policies; it is the product of Britain being still too dependent on in- dustries where their competitiveness is no longer outstanding, combined with the cumulative impact of a recession which has gone far deeper and has already lasted much longer than anybody actually ex- pected. We have had this kind of crisis before in this country, notably just after the first world war and then again in the depres- sion of the Thirties, when economic condi- tions beyond our control destroyed whole industries at a pace far faster than the rest of the country could counterbalance with the growth of new industries. We could be about to face another of these catastrophes.
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