§ I start with the economic background.
§ Since 1980, inflation has fallen steadily from a peak of over 20 per cent. For last year as a whole it was down to about 4½ per cent., the lowest figure since the 1960s. And with lower inflation have come lower interest rates.
§ This in turn has led to an economic recovery whose underlying strength is now beyond dispute. Whereas in some previous cycles recovery has come from a self-defeating stimulus to monetary demand, this time it has sprung from sound finance and honest money. Lower inflation and lower interest rates benefit industry, business and consumer confidence alike.
287§ Across the economy, total money incomes grew in 1983 by about 8 per cent., of which 3 per cent. represented real growth in output. Although there is still room for improvement, this is a very much healthier division between inflation and real growth than the nation experienced in the 1970s. Output in the second half of 1983 is now reckoned to have exceeded the previous peak, before the world recession set in, and is still rising strongly.
§ Productivity, too, has continued to improve rapidly. Just as over the past year many have wrongly predicted an end to the recovery, so some have tried to dismiss the sharp rise in productivity as a flash in the pan. Yet in 1983 manufacturing productivity grew by 6 per cent. for the second year in succession. Unit labour costs across the whole economy are likely to show the smallest annual increase since the 1960s. This has allowed a welcome and necessary recovery in real levels of profitability.
§ Higher profits lead to more jobs. The number of people in work increased by about 80,000 between March and September last year. The loss of jobs in manufacturing has slowed down sharply, while jobs in services increased by getting on for 200,000 in the first nine months of last year.
§ But further progress is needed. Although our unit wage costs in manufacturing rose by under 3 per cent. last year, our three biggest competitors, the United States, Japan and Germany, did better. The employment prospect would be significantly improved if a bigger contribution to improved cost performance were to come from lower pay rises.
§ Demand, output, profits and employment all rose last year. Home demand has played the major part in the recovery so far. Lower inflation reduced people's need to save, and real incomes rose. Personal consumption increased by over 3½ per cent. compared with 1982. Fixed investment rose rather faster than consumption, with investment in housing and services particularly strong.
§ Our rate of economic growth last year was the highest in the European Community. For much of 1983 our export performance was affected by weak demand in many of our overseas markets, while imports rose slightly faster than home demand. But by the end of last year world trade was clearly moving ahead again, and in the three months to January manufacturing exports increased very substantially. The balance of payments on current account last year is estimated to have been in surplus by about £2 billion.
§ Our critics have been confounded by this combination of economic recovery and low inflation. Even the pessimists have been forced to acknowledge the durability of the recovery. It is set to continue throughout this year at an annual rate of 3 per cent. Inflation is expected to remain low, edging back down to 4½ per cent. by the end of this year. With rising incomes and low inflation, consumption will continue to grow. And, encouraged by improved profitability and better long-term growth prospects, investment is expected to rise by a good 6 per cent. this year.
§ Looking abroad, too, economic prospects are more favourable than they have been for some time. Output in the United States should continue to grow strongly this year, and recovery is spreading to the rest of the world.
§ Of course, there are inevitable risks and uncertainties. The size and continued growth of the United States budget deficit is a cause of widespread concern and keeps interest rates high, exacerbating the problems of the debtor countries. And the need to finance the United States deficit 288 by inflows of foreign capital has kept the dollar artificially high and led to a massive and growing trade deficit, greatly increasing the pressures for protectionism within the United States.
§ A second potential risk is disruption in the oil market. The United Kingdom and, indeed, the whole world economy inevitably remain vulnerable to any major disturbances in this market.
§ But despite these risks there is a growing sense throughout the industrialised world that the recovery this time is one which can be sustained. The essential requirement is the continued pursuit of prudent monetary and fiscal policies.