Britain's Economy SIGNS OF CHANGE IN GOVERNMENT POLICY

Press, Volume C, Issue 29421, 25 January 1961, Page 12

Britain's Economy SIGNS OF CHANGE IN GOVERNMENT POLICY

London, January 17.—There have recently been interesting signs of a change of directioin in British economic policy. The economic wind is certainly changing, the ship is tacking, and a little more sail is being let out. The basic reason for this shift is the growing evidence of contraction in the British economy. The main focus of weakness is still the motor-car industry One of its leading firms is now working a 2J-day week. Another has put its workers on a three-day week. There is still no evidence of a recovery in the sales of household appliances which are so largely dependent on hirepurchase facilities. The retail trade figures for December reflected a high level of purchasing power, but that is always an abnormal peak month for expenditure, and the record retail trade registered on the occasion was in the main cash expenditure. The durable consumer goods trade which has been hit is now beginning to exert the usual multiplier effects on other industries. The demand for steel has ominously begun to decline. Reports from the Midlands suggest that orders for machine tools are being deferred. There is even some hint of second thoughts by the motor-car industry about its ambitious development plans announced last year, and destined to shift a substantia! proportion of motor-car preduction in this country from southern England and the Midlands to the shores of the Clyde and Mersey. . No General Slump No general slump is in sight, however. The Chancellor of the Exchequer <Mr Lloyd) in a recent speech could claim that consumption remains at a very high level, that over the last year the real wages in this country have risen by about 5 per cent., and that nearly 2500 companies, which had reported during 1960, had shown an increase of profits of 1 per cent, over their previous accounting period. All these claims, however, refer to the past and do not gainsay the evidence that a pause, admittedly at a high level, has for the time being descended on the British economy. It could be an extended pause, for the industries immediately affected occupy a crucial position in the British industrial structure Nor should it be forgotten that the maintenance of a high level of output in the second half of 1960 was in large part made possible only by building up stocks in the hands of manufacturers and retailers by a total estimated at nearly £5OO. If there is any appreciable running down of these stocks, it is not only a few isolated industries that will feel the shock, but a wide range of manufacturing activity. Need for Stinyilus It is these developments and portents which recently induced an unusually conservative and othodox banker, Mr Anthony Tuke. the chairman of Barclays, to suggest that the time might now be approaching when some relaxation “if not positive restimulation of the economy would be required.” He suggested that the first move in this direction might be a relaxation of hire-purchase restrictions, because hire purchase provides the means of bringing influence to bear rapidly on the economy. That hint was echoed by the Chancellor of the Exchequer who, in a subsequent discussion with members of the Trades Union Congress, said that relaxations of this kind were being considered. This, incidentally, is a case for acting quicky if there is to be any action at all, since there is no better way of bringing trade to a halt altogether than to suggest that easier terms are soon to be announced.

(Bh "LVNCtVS" ot IM -Economist”) (From the "Economist- Intelligence Unit)

Another suggestion made by Mr Tuke was that the banks might in due course adopt a much more flexible attitude towards the ratio of the liquid assets to deposits which they now maintain. This ratio is by tradition held at a min-

mum of 30 per cent.. and within the last few months it has acquired somewhat greater formality as a result ot a’ request from the Bank of England. Mr Tuke would like the banks to accept a much wider swing in their standard liquidity ratio, well knowing of course that if the authorities wish to limit the banks' freedom to make advances, they can always make use of the “special deposits” technique. which has been used in a somewhat tentative fashion for several months. These suggestions, coming from so cautious a quarter, reflect a significant change of attitude and could easily herald a corresponding change of policy. Major Reservation The major reservation on this score of a change in policy is rooted in the continuing vulnerability of the balance of payments position. The substantial deficit incurred in 1960 was veiled by a substantial inflow of shortterm foreign money. Most of that money will be in due course disappear. This in itself need cause no concern. The gold and dollar reserve which was built up with the help of this “hot" money is there to meet its withdrawal. In case of need, too, there are substantial drawing rights on the International MonetaryFund which should be used Beneath the surface of these capital movements, there is. however, the more fundamental fact of the merchandise balance of payments and of the current rise in wage rates. The round of increases which is now reverberating around British industry is certainly outstripping the current increase in output and productivity, That is an added reason for stimulating the economy. There must, however, be some assurance that the stimulation will not add fuel to the as yet small flames of wage-induced inflation. What is required is essentially an act of faith. In making it the British authorities will probably be helped by what is emerging from the Kennedy New Deal in the United States.

[On January 19 the Board of Trade announced variations in the hire-purchase regulations to allow cars, light vans, household appliances, and furniture to be paid for over three years instead cf two years. The rates of deposit are unchanged ]