In the City
Market directions
Nicholas Davenport
On Friday last week turnover on the Stock Exchange suddenly dropped like a stone. The Queen and Prince Philip were paying an official visit to the trading floor and all the television screens in the brokers' offices began to show the Queen's hat instead of the dealing prices of active stocks and shares. It is said that at lunch the Queen asked Mr Goodison, the chairman, to explain Insider trading' and it mode me wonder whether she reads the Spectator which discussed 'insider trading' in the City column that very week.
Brokers are now hoping for a little 'insider trading' to give the market its usual cheerful run up to Christmas. But what did they get but a somewhat depressing economic forecast from the National Institute of Economic and Social Research. In its new Bulletin the Institute estimates that growth of the GDP (gross domestic product) will slow down in 1979and continue to slow down in 1980 with an accompanying rise in unemployment. The official output figures are now based on 1975 prices, not 1970 prices, which means that the GDP growth of about 3 per cent this year would have been 21 per cent on the old basis. I am not suggesting that this is cooking the books for an election year. Indices have to be changed from time to time and the timing was lucky for Mr Callaghan.
I do not suppose that these hypothetical figures will affect sentiment on the Stock Exchange but it is important for the giltedged market to observe that the Institute's estimates are based on the assumption that the annual rate of increase in average wage earnings from now on will be 12 per cent (not 7 or 8 per cent as the Treasury is guessing) and that the rate of consumer price inflation will rise to 9 to 91 per cent in 1979., This implies that for the second year running workers are going to improve their standard of living without giving the nation much, if any, benefit from a rise in productivity. Fifty years ago the nation was exploiting the workers: now the position is being reversed through a few militants and malcontents.
It is therefore absolutely right and proper for the Government not to budge from its 5 per cent pay guide line. It is, in effect, telling the trade union leaders (i) that `responsible' bargaining requires an average rise in wages of only 5 per cent and (ii)that if bargaining becomes irresponsible the Government will give priority to its counter-inflation policy, in other words, very dear and tight money, perhaps some extra taxation, and a rise in unemployment. Will this make the unions see sense?
The National Institute is doubtful. Some trade union leaders (but not all) are fully aware that irresponsibly high wages lead to a loss of competitiveness, to lower exports and higher imports and thus to higher. unemployment. You may think that in the end market forces must surely bring about `responsible' collective bargaining, bfit the end, says the National Institute, may be a very long way away, especially when there is a floating exchange rate free to move downwards to protect competitiveness. Now we can see why the extreme left of the Labour Party is so opposed to our joining the European Monetary Union. They are fearful that a fixed or even a semi-fixed sterling rate would be the end of irresponsibly high wages. Happily the prime minister has made it clear that even though we have missed the start of EMU we are not going to be left out in the cold. I hope he will give a fur commitment to join next year after certain reforms have been agreed.
With the gloomy forecasts of the econornists hanging in the air there was an tinPlea,5; ant forecast of higher taxation from t"" London Business School Centre before the National Institute came into print it is not surprising that the markets on the Stoelc Exchange have lost their sense of direction. My advice to investors is to ignore the economists' divinations. Economics without psychology is not really worth a thought. It Is meaningless to apply financial measures, or pursue an economic policy without stud)/ the behaviour of the mind of managers workers: Oppressive taxation is not economic cure if it makes everyone fitsinclined to work. The miners stay away frnal the pits whenever they feel like it because they don't like working more than four dar., a week. Give them a four-day week and tile' output might jump. Selwyn Lloyd, whell Chancellor, brought the economy to a stool?' still when he introduced a pay freeze. Mill: view workers had to be taught a less°: because they had been sacrificing the nat.inu with their excessive pay packets. He failed and had to be sacrificed himself by gaCi: millan. Our present prime minister is a nine" wiser man and is trying to persuade um°, fools not to be so foolish. He may in the ettu persuade a sufficient number of them and SO avoid a sharp rise in the rate of inflation* If I may indicate some direction to those investors who feel lost I would say that thc, gilt-edged market is a buy. The mollel' supply has been undershooting its targe" bank lending to the private sector has bee° declining, inflows into the building societie5 have been running at half the level of a Yea( ago and the funding programme has heerif two-thirds completed with four months °` the financial year still to go. The market h55 been holding its fire for the time because there has been a rush into certificates e'f t,,3710 deposit. Last month the rate of interest CTDs was raised to 13 per cent with a furtht bonus of 1 per cent if held for more than' months. Naturally money has been poll into CIDs; it is estimated some £1,;', million. I cannot believe that the Chanc„c can hold such a high rate of interest for vea long. So the gilt-edged market is poised v.' jump. As for the equity market the gi°11.Yt economic forecasts derive from the fact tiwr the absurdly high Bank rate of 12i 1?,,e,, cent, if held too long, will undoubtedly h•fil a trade recession upon us. So let us conle this cheerful run up to Christmas with conviction that before long the 110115de authorities will see sense, even if the tira unions don't.
Previous page
