shopping for solutions
Kinnock heralds his own 'economic miracle' but workers won't be impressed
As Britain's economic problems mount, JEAN REILLY and JANE WELLS take stock of the situation and look forward to the Labour and Conservative Party Conferences: to see what's in store for them - and us. Once a year the major parties gather to promote their policies and to present their favoured profiles to the viewers at home as well as to the party faithful and not so faithful,
Neil Kinnock will attempt to look calmly in control and for all the world like a prime minister in waiting.
John Smith will lay it on the line about public spending restraint and studiously make no promises (knowing the trade union leaders will be good boys in any case). John Major on the other side will do much the same.
With growing intemational tension over the Gulf, and a mounting economic crisis at home, both main parties are faced with the SOCIALIST OUTLOOK no 27, October 1990
FEATURES task of providing credible short as well as long-term solutions to keep the voters happy.
Recession: the facts
Britain appears to be on - if not over - the brink of a new recession. Economic pundits everywhere are forecasting a bleak future, made bleaker if the conflict in the Gulf tums into a long war of attrition and vital Saudi oil production capacity is cut back for any period of time.
All the key economic indicators signal a retum to the problems of the early eighties, with the combination of a strong, over-valued pound (ie when British money, and therefore goods, are expensive, and imports cheap) and rising oil prices hitting profits - leading to a potentially very sharp fall in share prices and a sharp rise in unemployment.
Sterling is now very strong - although it is not as overvalued as it was when recession hit in the carly eighties. But the 'petro-currency" effect, with Britain cushioned from the the inflationary effects of the Gulf crisis by its independent oil reserves, may well lead to an even
stronger pound, as other competing economies suffer. In late August the pound reached its highest point in nine years against an (admittedly weak) dollar and at the same time it passed the three deutschmark level.
War in the Gulf
The likely escalation of the Gulf conflict into a full-scale war can only make things worse. As oil production is cut, oil prices will go up. The IMF has wamed that an escalation could lead to recession in the world's seven leading economies as the consequent inflation bites and trade balances deteriorate.
Because Britain is the only major industrial nation which is self-sufficient in oil, its trade balance will not be so directly affected by oil price rises. The rest of Europe, America and Japan however, will suffer. The developing countries with high levels of debt will be worst hit, according to the IME.
But in Britain the strengthening of the pound against the currencies of the major trading partners could significantly worsen the trade balance here by making imports
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cheaper. That's an alarming prospect for the figures Recent govemment. Britain's visible trade deficit was almost #24 billion in the red in 1989. This means the deficit has more than doubled since 1987. The slump in trade in manufactured goods goes a long way to explain these figures. The financial markets are worried too about what the Arab States could do with their S675 billion deposited in Western banks. Economic slowdown and Tory "solutions' In Britain, unemploy- ment has been rising steadi- ly for the last four months and is accelerating. This is due in part to the harsh ap plication of the economic brakes - very high interest rates - over the last two John Chancellor years. Major is clearly prepared to ride out a rise in unemploy- ment, despite the obvious signs that the economy is The now cooling down. Tories have done this before in the early eighties; this time however, the stakes are higher because the effects are not so containable. The Tories" very high in- policy has terest rale resulted in investment - starting from a low base - falling still further. The CBI's July Quarterly In- dustrial Trends survey showed that 30% of firms reported that their order books are below normal: the worst since 1983. But the regional breakdown of CBI findings make especially worrying reading for the Tories. When asked about business optimism, capacity utilisation and plans to shed labour, the south east and west midlands gave the most pessimistic answers. These electorally key regions contain between them nearly fifty marginal parliamentary seats; they have sus- tained the Tories throughout the boom years of the mid to late eighties. The attempt to stem the rising tide of credit has now led to bank and building society lend- ing falling to its lowest for three years. Bank lending to the personal sector was growing at 15% a year ago, now it's growing at only 6%. Even the housing bubble has finally burst: and the Tories could see another section of key voters disappear with it. Mortgage reposes- sions in the first six months of 1990 have near- ly doubled compared to last year, and morgage Page 8
FEATURES arrears have risen by 50%. Europe show that not) (ERM) of the European Monetary System. High interest rales and high unemployment: warning signs for the Tories tion to other currencies. imports more expensive. in Europe too.
Another central issue which has been exercising the mind of Mr Major over recent months is the question of Britain's entry (or
into the Exchange Rate Mechanism lem. Joining the ERM would mean that the value of sterling would be set at a constant rate in rela-
The strength of the pound makes this in many ways a good time for the Tories to join the ERM and to fix rates against the other member currencies at or near their current levels. It would give a clear indication that the pound was going to be held at its present level and not allowed to rise any further, and would offer welcome relief to British capital keen to encourage more sales of British goods at home and abroad, by making exports cheaper and And local
There are two major stumbling blocks, however. With the current low level of the dollar, British firms would still be uncompetitive in US