MONEY AND THE CITY
Institute and Market guesses
Nicholas Davenport
One begins to get bored by the continual wrangling of the professional economists. I made my protest against the Jayschool — not so madly juvenile as I had imagined — which preached under the banner of ' the boom which must go bust.' Now comes the National Institute of Economic and Social Research summing up in its latest Bulletin: "There is no reason why the present boom should either bust or have to be busted so long as the additional instruments of incomes policy and the floating exchange rate are retained. It is the existence of these instruments which differentiates the present expansion from the boom of 1963/64." It is a safe bet that while the talks with the TUC and the CBI at No 10 go on nothing will be allowed to upset the boom, for the talks could only hold firm on the common ground of economic growth. It is also a safe bet that if the talks do break down — and the defection of Hugh Scanlon makes this more likely — there will be an early election and a temporary hold-up of industrial investment on which economic growth depends.
While I accept the National Institute's general view one must not regard their actual forecasts as likely to be deadly accurate. There is always a wide margin of error, as they admit,. in their method of calculation from the demand-type of economic model they use. Indeed the Institute of Economic Affairs claims that their forecasts have been widely inaccurate. But they are surely correct in forecasting a very large rise in the gross domestic product this year of around 6i per cent. They may not be so correct in anticipating such a sharp deceleration in the GDP growth next year to around 3+ per cent per annum on present income policies. Their justification for this forecast is an anticipated sharp drop in the growth of real personal disposable income — from 7 per cent during 1972 to 5+ per cent during 1973 and to 3.1 per cent in 1974. The batting militant trade unions can knock this forecast for six. The shipbuilding and engineering unions are already formulating a staggering new wage claim.
Behind the sharp rise in the GDP this year is the boom in world trade. The volume of ex
ports of goods and services may grow, according to the Institute, by nearly 12 per cent this year and by a further 5+ per cent next year. The OECD area alone expects an output rise of over 7 per cent this year. The world boom is happily independent of British industrial relations.
As the rate of growth of consumers' expenditure in the UK is expected to slow down sharply from now on — through the rise in prices — the Government can fairly claim that for the rest of the year we shall have an export-led expansion backed up by an accelerating rise in industrial investment and stock building. In fact, an old type investment cycle is just emerging. The DFI expects investment outlays to be up by 5 per cent this year and possibly 12 per cent next year.
Are there really any signs yet of 'over-heating'? The National Institute rightly insists that there has been ample room for the expansion of the economy which has taken place. Although unemployment has fallen sharply, it is still above the level which it stood when Mr Heath took office. There is also room for the expansion the Institute forecasts in view of the cuts in public expenditure which Mr Barber recently announced. These cuts amount to £100 million in the current financial year and to £500 million in 1974/75. The Institute even questions whether the public expenditure cuts were really necessary.
I do wish Sam Brittan would stop finding evidence of economic over-heating in pockets of labour shortage. There have always been pockets of skilled labour shortage for as long as I can remember due to maldistribution and bad longterm planning in the construction industries. One reason is that unskilled youths today are so well paid as labourers that they will not bother to become apprentices and learn a skilled trade. Another reason is that skilled plumbers, carpenters and fitters leave their old firms to become self-employed and save enormously on tax. As the National Institute very neatly remarks, ' over-heating ' is an expression which has gate-crashed economic literature, "thereby avoiding payment of the entrance fee of a definition and escaping any critical scrutiny at the door."
Where I think the National In
stitute has been too optimistic is in its forecast of prices and wages. It expects commodity pri ces to fail back somewhat and our import prices to level out while export prices continue to rise. In other words, it expects the rate of price inflation to slow down — after some post-freeze catching up under the new phase of the prices and incomes policy — to an annual rate of 5 per cent by the end of the year. This seems to be far too rosy a view. The April re tail price index was up 9.2 per cent on last year while the average wage earnings were up 13.3 per cent (2.8 per cent on the start of the freeze). A look at the chart of the escalating rise in world com modity prices this year will not encourage any optimism about slowing down the rate of price inflation.
It is interesting to see that the National Institute has reduced its estimate of the current account deficit on the balance of payments this year from £875 to £750 million and from £525 million to £416 mil lion next year — assuming the exchange rates prevailing at the end of February. The Bulletin remarks that there must be some threshold value (for sterling) beyond which a deficit would cause a floating rate to fall significantly. They believe that their own deficit fore casts are well below this threshold but there would be an ugly cost — in higher domestic prices — if they were wrong.
The announcement of an autumn election might be the signal for a foreign attack on sterling and the disappearance of the threshold. The Labour election plans for a massive leap forward in nationalisation might frighten the foreign holders of sterling but they would certainly not frighten the British elector. Nothing would be more likely to increase Mr Heath's majority. Nothing would be more certain to increase the cost of living for the housewife than for the state bureaucracy to take over our most important and efficient companies which have been able to keep their selling prices relatively low. The elector is not likely to forget how easy, as well as inevitable, it has been for the state coal, gas and electricity boards to raise their prices. One can see Mr Heath returning to power with an increased majority on the assurance that he alone can keep both private capitalism and state bureaucracy in order. So while there is nothing in the National Institute bullishness to encourage buyers of British equity shares an interesting opportunity might well occur this autumn when the market is flat.
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