Britain Starts Back Up

Pangloss with facts

British Chancellor of the Exchequer Denis Healey possesses a splendid--some think notorious--gift for Panglossian rhetoric in the face of economic distress. Last week he held forth with customary ebullience on Britain's economic prospects. But this time his optimism was well grounded. In addresses to Common Market finance ministers in Brussels, the Chancellor detailed evidence of solid performance:

>In August, Britain recorded a trade surplus of $550 million, its largest since World War II. The overall balance of payments is moving into the black.

>The annual inflation rate declined from 17.6% in July to 16.5% in August and is expected to drop to 12%-13% by the end of the year.

>Interest rates are down to 6% from a 1976 high of 15%.

>A fortnight ago, the pacesetting 30-share Financial Times stock market index reached an alltime high of 549.2, six points above its previous record in May 1972. Profit taking and some unfavorable corporate reports have since eroded prices somewhat; last week the FT index closed at 504.7, still a spectacular rebound from its nadir of 146 in January 1975.

An end to Britain's long economic malaise? Hardly. As a new Bank of England study points out, the economy is still deeply mired in stagflation. Industrial production is running 7% below its 1973 peak and is expected to grow only 2 1/2% by the end of 1978. Unemployment has reached a postwar high of 1.6 million and is still expanding, and even an inflation rate of 12% would be ruinous over the long term. If market prices were adjusted for the withering effects of inflation since the 1972 apex, the FT index would have had to hit 1,200 to set a new record.

Yet signs of optimism were real, and they marked the beginning of Britain's long-anticipated great oil bonanza. With crude from the North Sea fields coming ashore at the rate of 830,000 bbl. per day, the nation will produce about half of the oil that it consumes this year, saving some $3.6 billion in its balance of payments. Oilmen expect that the country will be come self-sufficient in petroleum by 1980. Said Prime Minister James Callaghan after a visit to the huge "Forties" field: "God has given us an opportunity we have not had in a century. When you think about the impact of this [oil] on the country's fortunes, it is really astounding."

Investors, both British and foreign, have been doing plenty of thinking about just that. As a result of heavy cash in fusions from abroad, the price of sterling has risen sharply from a low of $1.55 in 1976 to $1.74 last week. As the funds accumulated, the Bank of England steadily reduced interest rates, thereby providing the stock market with the boost that helped bring the current flurry.

By far the most serious threat to Britain's budding recovery is the possibility of an explosion of wage demands from restive union members. Callaghan got the Trades Union Congress to endorse, by a margin of nearly 3 to 2, a plan that would limit employees to one pay raise over the next twelve months (TIME, Sept. 19)--a scheme calculated to spur investor confidence. But Callaghan's government has yet to tame several of the more militant unions. Toolmakers at problem-ridden British Leyland promptly threatened to walk out over an old dispute concerning their "pay differential" as skilled employees. If attitudes like that should prevail, Chancellor Healey will have to return to his old policy of optimism by artifice.

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