A STEADY RECOVERY IS STILL INDICATED

Press, Volume LXXXIX, Issue 27097, 21 July 1953, Page 8

A STEADY RECOVERY IS STILL INDICATED

BRITISH TH ADE

[From the “Economist” Intelligence Unit]

Britain’s gold and dollar reserve figures for the end of June reflect a continuation of the steady recovery which began in September, 1952, and has been interrupted since then in one month only, December, when the new movement was dominated by the annual payment that must now be made on the United States and Canadian loans. Disregarding this particular factor, it can be said that the recovery of the reserve has now been going on for 10 months. It has raised the reserve from a low point of 1672 million dollars at the end of August, 1952, to 72,367 million dollars at the end of June, 1953. The persistence of the recovery in these mid-year months is particularly cheering. This is the time of the year when sterling area earnings of dollars are normally at a low ebb. It will be some weeks before the new wool clip begins to move to the hard currency markets and cocoa and other sterling area commodities begin to earn dollars at anything like their peak rate. It is true that some benefit has been felt this year from the abnormal inflow of foreign tourists who came here for the Coronation. But this is probably being neutralised by the concessions made earlier this year in the form of increased foreign exchange allowances to British tourists wishing to travel abroad. The larger travel allowances are being used with a vengeance; and it is more than probable that the net balance of the tourist account for 1953 will fall as usual on the debit side. The trend of the reserves and the concurrent and supporting strength of sterling in the foreign exchange market make it almost certain that the regular sequence of Britain’s balance-of-payments crises in the odd years of the post-war era will be happily broken. Up to now they have been unfailingly regular. They have fallen in the second half of the year. In 1945 it was the crisis of exchange exhaustion caused by the war and brought to a head by the sudden cessation of Lend-Lease from the United States. In 1947 the short-lived convertibility of sterling had to be rescinded quickly, when the dollars lent to Britain after the war by the United States and Canada had been virtually exhausted. In 1949 came the devaluation crisis. By 1951 the “shot in the arm” provided by this devaluation had worn off and gold was again being lost at a dangerous rate. From that crisis Britain extricated itself by desperate import cuts, but also by longer term measures, for which the political background was provided by the change from a Socialist to a Conservative Government. Britain once again chose the path of economic freedom and began a retreat from controls, rationing and subsidised prices—and this retreat goes on. Cheap money was abandoned and credit discipline revived. The Commonwealth was mobilised in a- common economic policy, intended to lead back to multilateral trade and convertible currencies.

A Happy Break Likely It is because these long term and basic measures were taken that 1953 is likely to see a happy break in this post-war sequence of odd year crises. The justification for making this confident prophecy is to be found in the latest gold and dollar reserve figures. They admittedly show some slowing down in the rate at which the reserves are being built up. The addition for June was only 46,000,000 dollars and, of this, 28,000,000 dollars represented receipts from the United States as defence aid. But on the other side of the account due weight shduld be given to special operations that were holding back the recovery of the reserve. The biggest of them was the 22,000,000 dollars paid to the United States in June for the repatriation of a large share-holding in Associated Electrical Industries, previously owned by the General Electric Company of New York. For special reasons—strategic and financial—it was decided that an opportunity to return these

shares to British ownership wv. offered itself earlier this year shSft be taken. This operation was, in an export of capital to the Unffi States. Had it not taken place tk recovery in the gold and dollar serve last month would have strikingly large, taking into accS the time of the year at which u occurred. 4 Nor has this operation been the export of capital to the dollar wrS? Britain is at long last beginning ♦ participate in the tremendous caniiS development programme in Cans? The Bank of England has in reS months been much more lenient th it was formerly in sanctioning tnS? fers for authorised investments j Canada. That has also put son? strain on the gold and dollar reserv Restoration of Confidence in SterllJ Unless some extremely adverse jS unexpected developments occur S the next few months, the year lass will close on a note of strength 2 continued restoration of confidence i sterling. This performance and Dm? pect betokens a reasonably good formance by British exports. Th P are meeting keener competition fS Germany, Japan and the United States; but the monthly overseas trad returns show a satisfactory main tenance of such basic exports as motor cars, engineering products and'caoiS equipment of all kinds. From the point of view of Britain’! own balance of payments (the sold and dollar reserve reflects the otier? tions of the sterling area as a whole) perhaps the most importent factor nt improvement has been the fall in com, modity prices. The terms of trade continue to move in Britain’s favour One of th? most significant symptom of that phenomenon is the steady crumbling of the price of wheat It begins to look as though Britain’s defiance of the International Wheat Agreement is paying off. Not only hai the free market price quoted in Chicago fallen below the new Inter, national Wheat Agreement minimum but Britain has within the’last few days also negotiated a purchase of 80,000 tons of Argentine wheat at Ltt dollars a bushel, which compares with the new International Wheat Agree, ment maximum of 2.05 dollars and with the price of 1.86 dollars, which was paid under the first version of the wheat agreement now coming ta an end. It may be argued that a favourable turn in the terms of trade for Britain is an unfavourable one for the sterling area as a whole. That depends upon which commodities fall and the ex. tent to which they fall. At present it is essentially the group of commoditiei with high dollar contents—wheat, aluminium, pulp and paper and timber—which is showing signs of weakness. Prices of wool and cocoa, to take two typical and- important sterling commodities, are steadv to firm. On all counts, therefore, the immediate prospect can be viewed with reasonable confidence. The chances of a repetition of the balance-of-pay-ments crises in odd years are becoming less. This does not mean that the situation can be viewed through rosecoloured and complacent spectacles. The British Chancellor of the Exchequer has made the point that the improvement in the balance of payments situation is occurring in the context of a steadily increasing tempo of competition in world markets. That renders it all the more essential to keep production costs in healthy trim. On that particular front clouds are beginning to gather on the British economic sky. Another substantial wage increase has just been granted to agricultural labourers. It is the most self-perpetuating type of rise in wages, since it will immediately impinge, bn the cost of living and, therefore, encourage higher wage demands from industry. The spectre of wageinduced inflation is somewhere backstage. Whether the reassuring short term prospect can be extended to I longer term depends on our succes in keeping the spectre backstage.