THE ECONOMY
The year that depends on Mr Lawson's timing
JOCK BRUCE-GARDYNE
Horace Walpole, who knew a thing or two about these matters, counselled that `the wisest prophets make sure of the event first'. And so, confronted by the seasonal obligation to consult the crystal ball, I did some jobbing backwards.
And how familiarly it read! Twelve months ago, I found, it seemed appropri- ate to urge the Chancellor to encourage his neighbour across the wall to call the nation to the polls in the spring of 1987. I'd stand by that. In January 1986 we were agonising about the imminent prospect of the price of oil going into free fall, leading to a need for heroic feats of creative accountancy on the part of the international banks to show that their loans to such countries as Mexico and Brazil were still 'performing'. But it could be argued that there was a deal of ruin in the international banking system.
So it proved. Oil went into free fall, and nobody defaulted. A particularly under- standing 'rescheduling' — i.e. deferment — package was worked out for the Mex- icans' debts. Custom-built, you under- stand, and not for copying. Since when every self-respecting debtor nation has been busy copying it. Creditor banks are sick as parrots, but then as they responded to the hypochondriac who complained about the miseries of life, 'consider the alternative'. We've reached the stage where even the pretence of an Internation- al Monetary Fund health-check as the precondition for rescheduling is in process of abandonment. Yet few now doubt that the banks will muddle through in 1987.
Scandals in the City were all the rage in January 1986, and they still are, although their nature may have changed. Then it was skulduggery at Lloyd's, and some rather wild allegations about the Bank of England's handling of the Johnson Matth- ey Bankers' rescue operation which were, in the estimation of more fanciful Labour MPs, about to bring Mrs Thatcher crashing down. The Westland entanglement, which at moments did have the Government almost on the ropes, did not rank a mention. Horace Walpole had a point. But it would, I think, be hard to show that Lloyd's little local difficulties have swayed many votes away from the Government. And as for the Bank's rescue of JMB, it seems to have ended rather well. The exposure of Mr Collier and other lesser or perhaps greater — mortals in and around the City may turn potential Tories off in droves when the moment comes. But I rather doubt it.
Twelve months ago the Bank of England was a good deal more alarmed by 'a potentially worrying build-up of the liquid- ity of the private sector'. It still is. Only the nature of the angst has changed. Until well on into 1986 — indeed until the Governor's recent pilgrimage to Loughborough — the Bank of England, unlike the Treasury, continued to express a vague unease about the implications of the soaring growth of `broad money', or sterling M3, and bank lending, for future inflation. But now the Bank has fallen into line. It agrees with the Treasury that the £M3 dial is off its rocker, and means naught for our discomfort. All that matters now is that we are allowing credit cards to be pressed upon us far too eagerly, and will land up in the state of poor Mr Micawber. But not, with luck, this side of the next election.
Once again the Chancellor's books are looking distinctly chipper, with the con- sumer boom reaping cash for the Inland Revenue way above all expectations, the prospect of a sharp recovery in oil re- venues, and the past 12 months of low inflation reflected in well-behaved public spending. If there is a ghost at this year's impending annual Treasury winterfeast at Chevening, it is one that has been hovering around for many moons, but is now be- coming harder to ignore: protection. It shakes its chains around the international markets. 1987 could well prove to be the year when they start to bind severely. To the existing stringent restrictions on US steel imports are now being added artificial barriers to Swiss and German machine tools and threats of reciprocal discrimina- tion against European telephonic equip- ment, while Japanese export efforts are diverted from the US to Western Europe by cartel deals between the American and Japanese semi-conductor manufacturers.
Over everything hangs the shadow of the dumping war between the US and the European Community in surplus agricultu- ral products. For even if Mr Jopling's `triumph' over butter and beef just before Christmas does achieve eventually a reduc- tion in those two 'mountains' (a substantial if on past performance) it leaves quite unaffected the commodity which really matters in international trade, namely cereals. Here the prospects are that Washington and Brussels will very soon be swapping something a good deal more substantial and damaging than insults.
Nevertheless we have it on the authority of the Chancellor that 1987 will bring both `slightly faster' growth for the British eco- nomy, with inflation 'continuing low', and unemployment falling significantly at last. If he is right then Messrs Kinnock, Steel and Owen have quite a lot to be worried about. The OECD is much less confident, warning of accelerating inflation and a nasty hole developing in our trade accounts. To which the Treasury responds that the OECD, like other commentators nearer home, grossly underestimates the accelerating value of our income from overseas investments and the rest of the invisibles'. Meanwhile Mr Lawson's favourite indicator of monetary conti- nence, the much-despised 'Little Mo', is threatening to play truant?
Fortunately monetary indicators which produce unwanted signals can always be discovered to have gone on the blink, and whatever the Chancellor may have said about the behaviour of 'Little Mo' justify- ing his recourse to higher interest rates last October, it is hard to see him (or his next door neighbour) sanctioning another rise in the cost of borrowed money in the coming months just because 'Little Mo' has taken to the bottle. A run on sterling would be a different matter.
`The year 1986', I wrote twelve months ago, `could produce all sorts of horrible surprises,' as indeed it did. But the Gov- ernment rode them out without lasting damage, and Mrs Thatcher's Cabinet is looking far more footsure as 1987 dawns. than it did twelve months ago. Moreover unemployment is now heading in the right direction, albeit marginally, and living standards of those at work go on rising steeply. If only Mr Lawson can persuade his leader to take us to the polls in good time before the consumer boom runs out of puff (or worse), and without waiting to find out whether the OECD or he is right about inflation and the state of trade, he could yet go down in history as the mate who steered the Tory craft to its third victory in a row. There remains the $64,000 question: can the lady be persuaded?
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