In the City
And a prosperous New Year!
Tony Rudd
The Christmas cards which one is about to throw away wished one not only a happy Christmas but also a prosperous New Year. It will be prosperous for a few, but for many it will be something if they actually complete the new year; survival rather than prosperity is all they can hope for. But that applies mainly to businesses in industry; those in the City will in the main still be there in twelve months' time, though in what shape it is more difficult to tell.
Certainly the mood of the City as the new year opens is not particularly confident. War-weary would be a better word for it. To begin, it seems evident that very few people know where the country actually is in this recession and how quickly or slowly we are going to get out of it. The experts differ to an almost grotesque degree. A few days after ministers are saying that the tide is turning the Bank of England comes out with exactly the opposite view. The all-party select committee reports on gloomy lines. The financial journalists hardly change; they have taken up battle positions in which they have been entrenched now some of them for upwards of a year; either they are supporters of official policy or valiant opponents, each seizing upon titbits of evidence to support their case, such as most recently the extremely depressing assessment by the OECD which looks to the possibility of three million unemployed by mid-1982. In these circumstances it is hardly surprising that it is difficult to find a representative view about 1981. On the other hand one can take a kind of median line through the various opinions.
Starting at the political end, Mrs Thatcher still enjoys considerable respect in the City. It is one of those cases where the leader having laid down the policy has somehow managed to rise above the immediate failures which that policy appears to have produced. The blame for them has, conveniently for her, attached more to her lieutenants, whose job it was to carry her views through to a practical end, than it has • to her. Considering how very much she herself was the author of this Government's economic programme, this transference of blame is little short of miraculous. Perhaps this is what always happens when policies go wrong. For instance with monetarism it was always thought that sticking to particular figures and taking action so that the money supply came into line with the targets laid down (rather than the other way round) was a specific part of the Prime Minister's own plan. After a year of the clearest possible ,demonstration that this kind of exact monetarism does not work, the view is forming that perhaps this wasn't Mrs Thatcher's fault at all. What she wanted, this theory goes, was the selection of the right implements of policy so that the general aim of bringing down inflation and getting the public sector under control once more could be achieved. She didn't mind what the forecast for M3 at any particular time might be just so long as the control of money and credit was adequate for the general purpose. In particular, obviously, she didn't want figures to be announced which would turn out to be gravely embarrassing in relation to the earlier targets. This kind of thinking clears the way for some changes at the top.
The City has no specific ideas on what this might involve or who might gain at whose expense. It is just the feeling that halfway through this type of campaign, indeed any campaign, the leader so often brings in a few new generals. It encourages the troops who, though they still have faith in ultimate victory, have surely lost confidence in those handling the particular battles which involve them and the leader has got heartily sick of some of the more familiar faces around the headquarters. The latter, incidentally, can be the only explanation for the recruitment of Professor Alan Walters, who is to be plucked from his important position in America to become the Prime ,Minister's personal economic adviser. Exactly how his role will or will not fit in with that of Mr Terry Burns, economic adviser to the Government, has yet to be spelt out. Mr Walters will bring to the discussions on policy all the freshness of ideas of one who has been spared the application on the ground in the UK during the last eighteen months. For those involved in day-to-day management, for instance of the nationalised industries, his fresh 1979 style approach could prove to be infuriating.
However, with all their doubts City observers still expect the long-awaited decline in interest rates. And for that reason they still think that 1981 will see a substantial rise in the gilt market. Admittedly they thought that both 1979 and 1980 would be good for gilts. The disappointments of these years hasn't however altered the basic view that eventually interest rates must fall at the long as well as the short end during this recession.
The industrial outlook is much less clear. A fall in interest rates will naturally help industry ashigh'ratesare particularlydifficult to bear during a recession. But what industry needs during 1981 is a revival of demand. Fortunately most City analysts would agree that there is some prospect of this occurring. What has been so noticeable about 1980 is that demand by the ultimate consumers of industrial products held up better than might have been expected considering all the symptoms of recession which have been visible around us. The explanation for industry doing so badly while consumption remained pretty constant was that the economy experienced the biggest de-stocking cycle it has had since the war. In previous business cycles the level of stock has not varied all that much. The traditional constraint on consumption in the UK has been imposed by the balance of payments; deficits in this balance weakened the exchange rates, thus forcing a cutback in demand and the rest followed. But in 1980 the restraint was a tremendous drop in stocks which, when fed back to the production level, imposed a massive restriction in demand. The evidence seems to be that this de-stocking phase is now coming to an end. If that is correct then normal ordering will resume and even a slight decline in consumer demand in 1980 as compared with 1980 will be outweighed by the recovery produced by the end of de-stocking. It is upon this more than anything else that City hopes for 1981 depend. Compared with this factor the political, even the fiscal, outlook for 1981 is relatively Pnimportant.
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