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The Economic Situation: Chapter I. the Home Economy
Published online by Cambridge University Press: 26 March 2020
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In previous Reviews, we had suggested that the economy would be likely to encounter a phase of particularly sluggish growth in demand and output. The performance since the beginning of this year suggests that this view, so far from being too pessimistic, was actually an overstatement of the prospect for expansion. The national accounts figures for the first quarter, just published, indicate a drop in activity between the fourth quarter of last year and the first of this : but while all three measures of gross domestic product (income, output, and expenditure) agree in this movement, as they do also in showing a fairly sharp rise in the fourth quarter of 1969, it seems probable that they are giving an exaggerated picture of the movement of the economy in these two quarters. This is particularly true of the expenditure measure, which incorporates big changes in stockbuilding between the two quarters. These are probably associated with timing discrepancies in the recording of other elements of expenditure. But even assuming that this is so (which would imply that the first quarter fall indicated by the unadjusted ‘compromise’ figure of GDP in table 1 is overstated), the evidence of the industrial production index gives no reason for thinking that the subsequent recovery of GDP likely to be recorded for the second quarter will be very much more than a ‘statistical’ one, correcting for the previous aberration. The average value of the industrial production index for April and May was rather below that of the first quarter and although some recovery can be expected for June (especially as the May figure was affected by strikes), the underlying trend of the economy during the first six months of the year must appear, at best, to have been no more than slightly upward. The steep rise in unemployment recorded in June—following six months of little change—is consistent with a lagged response to this trend in output.
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(1) On this basis, it looks as though the rise in GDP between the first half of 1969 and the first half of 1970 was about 2 per cent, the annual rate of rise between the second half of last year and the first half of this year being only about 1 per cent.
(1) The growth rate of GDP now forecast for the period 1970 II-1971 II works out at about 1½ per cent, which com pares with an increase of just over 2¼ per cent forecast in May's Review. Owing to the fact that output in the first six months of the year has already proved less buoyant than previously forecast, the difference between the current ‘through the year’ forecast (1970 IV/1969 IV) and that of May is even more marked, the current forecast being for a growth of only just over 1 per cent as compared with the earlier prediction of just over 2¼ per cent.
(2) ‘Exogenous' here refers to expenditure components whose magnitude is taken to be largely independent of move ments in GDP in the forecast period.
(3) The ‘fourth quarter on fourth quarter’ growth rates of investment are very similar at about 2-2¼ per cent in each year.
(4) A discussion of possible dock strike effects is, however, given below on pages 16-18.
(1) These figures are actually rather higher than those which were assumed in preparing the main forecast for the economy, the revision being provoked by the receipt of the most recent data on the value of world trade in the second quarter of this year. These data suggest that our original estimate of world trade was too low and it seems likely that the error was in prices rather than volume, so the forecast for import prices should possibly be raised. The export forecast might also be raised but should probably be less affected, so that the net result would be to reduce slightly the forecast balance of payments surplus for this year and next. The reduction for 1971 might be up to about £60 million. There would be other repercussions on the internal economy but of a small order of importance.
(2) Average values, 1970 II-1971 IV, annual rates.
(3) The forecast for export prices employs a guideline equation which relates the export prices of manufactured goods to unit wage costs, prices of imported raw materials and the value of world trade.
(1) Nor does the disaggregated system appear to imply that there is any particular problem about the first half year's already recorded levels. Hence it would give less reason to expect any reduction in the second half of the year, and leads on to higher levels in 1971. If the predictions from this system had been wholly preferred the current balance pre dicted for this year (table 4) would be significantly less, and so would the improvement between this year and 1971.
(2) No further deliveries are expected this year but another six ‘Jumbo’ jets are expected to arrive in 1971, one in each of the months February, March, April, and September, and two in December. Rather than assign the ‘Jumbos’ on the precise quarterly basis implied by the expected delivery dates, allowance has been made for a proportion of the expected total in each quarter of the year. This matches the way in which the investment forecast incorporates the ‘Jumbo’ purchases and disturbs least the picture of the underlying trend. That a special allowance should be made at all rests on recognition that the import relationship used in the fore casting scheme will fail to allow fully for the 100 per cent import content of these items.
(1) For a tabulation of the expected effect of the budgetary relaxations on consumers' expenditure and GDP, see National Institute Economic Review no. 52, May 1970, table 4, page 9.
(1) National Institute Economic Review no. 52, May 1970, pages 8-10, and 17-18.
(1) It may bear repeating that the forecast does not allow for any permanent loss effects due to the July dock strike. Nor has any allowance been made for speculative effects associated with the progressive removal of the import deposit scheme.
(2) A further discussion of the export and import forecasts appears above on pages 6-8.
(3) There is, however, a qualification. Figures which have come to hand since the completion of the forecast presented in the main text suggest that the improvement will probably be less than indicated here, mainly because import prices will probably be higher. See page 7, footnote (1).
(4) At the risk of being pedantic, we must state clearly what we mean by ‘reflation’ as opposed to what we mean by ‘inflation’. By ‘reflation’ we refer to measures (such as tax reductions) which would result in a rise in the flow of real expenditures, real demand and output. This is to be distin guished from ‘inflation’ by which we mean to refer only to the time rate of increase in prices or costs. Whether reflation involves an increase, decrease or no change in the rate of inflation is thus a matter of fact, not of definition.
(1) A possible fourth is provided by the view that, contrary to the impression given by the unemployment figures, there is in fact little margin of slack in the economy at present. It is quite clear that the unemployment figures are standing much higher in relation to most other labour market indicators (but not in relation to employment figures) than used to be the case, before the latter part of 1966. But two points should be made: first, the extent of the ‘correction’ which should be made to the unemployment figures to secure a true reading of slack can easily be overestimated (see National Institute Economic Review, no. 51, February 1970, page 36). Secondly, the current forecast for output indicates a substantial further rise in the margin of slack: the purpose of reflation would be to prevent, or restrain this tendency.
(2) In the past the average annual increase in the prices of British exports of goods and services has been much less than for consumer goods and services in the home market. For example, over the ten years 1957/1967 the comparative figures were 1.2 per cent for the former and 2.8 per cent for the latter.
(3) Professor Weintraub has recently suggested in a provo cative article that the logical implication of this kind of attempt to control inflation is, in fact, an incomes policy! See S. Weintraub, ‘Incomes policy in the monetarist pro gramme’, Bankers' Magazine, August 1970, pages 71-76.
(1) If past experience is any guide, this is not mere wishful thinking. A plot, over the past 15 years, of the increase in real GDP against the increase in prices (the GDP deflator or the retail price index) shows that in general, the faster the rate of increase in output, the slower the rate of increase in prices. This inverse relationship, interestingly, does not appear to hold for the United States.
(2) At the end of the first quarter of 1970, shown on chart 2, outstanding short- and medium-term debt stood at £1,654 million. It has been indicated that by the end of the second quarter this had been further reduced, to a level of £1,461 million.
(3) Further, as noted on page 7, footnote (1), the latest figures of world trade in the second quarter suggest an initial inter pretation that import prices may be running at a higher level than suggested in our main forecast.
(1) Press reports indicate, however, as is not surprising, that the original published Treasury and OECD forecasts are now regarded as ‘over-optimistic’ by their authors.
(1) See Board of Trade Journal, 15 July 1970, page 78.
(2) Unlike the November inquiry, which produces a quanti tative estimate of investment intentions, the May inquiry produces only figures of the proportion of companies wishing to revise up, or down, or to retain unamended the intention expressed in the previous November.
(3) This view has also been expressed in the comment on the first quarter's figures which appeared in the Board of Trade Journal, 17 June 1970.
(4) It was similar considerations which persuaded us, a year ago, to introduce a declining profile in manufacturing investment in 1970 (National Institute Economic Review no. 49, August 1969, page 6), a prediction which was given up when the November intentions data were released.
(1) The (very tentative) estimate of £25 million was given in the National Institute Economic Review no. 39, February 1967, page 5. An earlier estimate, in the National Institute Economic Review no. 36, May 1966, pages 8-9, suggested (again, very tentatively) a loss of more than £10 million in the event of a one-month strike, and proportionately more in the event of a longer strike (the strike actually lasted two months).
(2) The lower estimate of $600 million loss was obtained by using share analysis. An official estimate published in the Survey of Current Business for December 1969, based on the regression equations used in forecasting, put the range of loss at from $800-$900 million. An estimate was also given in this source for the loss of imports, which was put at around $400 million. The American strike began in all ports affected on 20 December 1968 and returns to work occurred in different ports at different dates between mid-February and early April 1969.
(3) This allows for plausible maximum increases in the throughput of outlets not affected by the dock strike (air- freight and certain ports not involved in the dispute).
(1) All other things (including wage costs) remaining equal. Thus it is implied that the restraint of prices would be felt in reduced surpluses or increased deficits, with consequent effects on the financing requirements of the nationalised industries.
(1) For a fuller discussion of this question see National Institute Economic Review no. 52, May 1970, pages 17-18.