§ I refer first to international developments. The past year has brought recession to a number of major industrial countries including the United States, Canada and Australia. Growth in Germany has been sustained by reunification; but elsewhere in Europe, activity has slowed and industrial production has fallen in recent months in Spain, Italy and France. In five of the seven leading industrial nations, industrial output is now lower than it was a year ago.
§ The basic cause is the same everywhere: very rapid growth in the industrialised world during the 1980s led to the re-emergence of inflationary pressures. A period of slower growth was needed to stop inflation taking hold again.
§ In the autumn, the slowdown was magnified by the Gulf crisis. Business and consumer confidence were badly dented, first, by the uncertainties and the sharp rise in oil prices that followed the invasion of Kuwait, and then the prospect of war. Travel and tourism were especially hard-hit.
§ Mercifully, the war was brief and the outcome successful. Confidence is recovering and that will strengthen the economic upturn when the time comes; and the fall in oil prices has already improved the outlook for inflation.
§ So although 1991 as a whole will show little growth in the seven major economies—a ½ per cent. increase in industrial production compared to 5¾ per cent. in 1988—the slowdown is unlikely to last long. Inflation is already moderating in those countries that are in recession, and activity should start to recover later this year in north America, helped by continued expansion in Germany and Japan.
§ In the United Kingdom, the recession came after eight years of growth averaging 3 per cent. a year. This sustained growth bred confidence and that in turn led to a quite unprecedented rise in borrowing. Personal borrowing increased by nearly 40 per cent. in 1988 alone, to reach £54 billion—and a new record for the ratio of debt to income. This produced a sharp drop in the personal saving ratio, which coincided with a massive boom in investment by companies.
§ In itself, the rise of investment—nearly 80 per cent. between 1981 and 1989—was welcome, but the economy could not go on expanding at that rate. Some firms and individuals became over-extended and we saw a deterioration in the current account and a wholly unwelcome rise in inflation.
§ It is easy, with the benefit of hindsight, to say that policy should have been tighter; and, once the problem became clear, policy was indeed tightened. We ran a large budget surplus. Interest rates were raised, and they had to stay high until there were unmistakable signs that excess demand pressure had been removed. That took longer than we—or outside commentators—expected, and the delay meant that the adjustment, when it came, was all the sharper.
§ Since the middle of last year, individuals and companies have been taking steps to reduce their borrowing. Consumer spending has fallen back, and the saving ratio has risen sharply to 10.8 per cent. Firms have found it hard going. Profits have weakened, caught in the pincer of low turnover and rising costs, and the burden of debt taken on in the late 1980s has proved a heavy one.165
§ It is not surprising, therefore, that business investment has fallen from the heights of 1989 and early 1990. Stocks are now being reduced, and companies are making strenuous efforts to cut costs. That has led to a sharp increase in unemployment during recent months, although there are welcome signs that firms are continuing to invest in skills and training. I expect output in 1991 as a whole to be about 2 per cent. less than in 1990. Much of that fall, of course, has already happened. It is largely behind us and, as I shall be explaining in a moment, the resumption of growth should not be long delayed.
§ The process of retrenchment has been painful, as it always is, but it has been necessary and is now producing results. The current account deficit has improved sharply—especially the balance on manufactures—even though world trade has been weak. Imports have fallen. while exports in some sectors, notably cars, have continued to grow strongly—testimony to the fact that industry is immeasurably better placed today than it was 10 years ago.
§ No one can doubt that inflation is on the way down. There has already been a fall of 2 percentage points since the peak last October, and there is widespread agreement that the fall in inflation will continue through 1991 and into 1992.
§ The prospects are now better than they appeared at the time of the autumn statement. The February survey by the Confederation of British Industry showed that the balance of firms expecting to increase prices was at its lowest level ever. The forecast published today, taking account of the effect of the Budget measures, is for inflation to fall to an average of 4 per cent. in the last quarter of this year and below 4 per cent. in the first half of 1992. The prospect, therefore, is that we will narrow the inflation gap with Europe remarkably quickly.
§ In the mid-1980s, we did get inflation briefly below 4 per cent., and we saw the advantages that followed. We are about to do so again, and again we will reap the benefits. Lower inflation, and the lower interest rates that go with it, will be a powerful force for recovery.
§ One of the lessons that I have learnt from years of grappling with economic statistics is that it is difficult to be certain about the past, let alone about the future. It is always especially difficult to predict the timing of turning points in the economy. However, there are good reasons to expect that the recovery will begin around the middle of this year, although initially it may be slow.
§ As we found 10 years ago, confidence revives as inflation comes down. This time, the ending of the Gulf war will give the revival an added boost. Just as falling consumer spending contributed to the onset of recession, so returning consumer confidence is likely to lead the recovery. At the same time, the reduction of stocks is likely to slow and the United Kingdom will benefit from the upturn in the United States and elsewhere in the world.
§ As a result, I expect output to stabilise in the next few months and then to increase by about 2 per cent. between the first half of this year and the first half of 1992. Looking further ahead, our projections show growth of about 3 per cent. a year as the economy recovers further.
§ The easing of demand pressures has already brought a marked improvement in our current account. As the House will have noticed, there can be lags not just between policies and their effects, but between the effects in the real world and their appearance in the official statistics. As a result of the recent revisions of the figures for invisible imports and exports, the current account deficit for last 166 year is now estimated at under £13 billion, £2 billion less than forecast at the time of last year's Budget. This year, I expect the deficit to be halved to £6 billion, about 1 per cent. of national income.
§ Regrettably, unemployment is likely to go on rising for a while yet, even after the recovery has started. How far and how fast it rises will depend, in part, on the speed with which pay settlements come down—and come down they must, eventually, to the levels prevailing in other ERM countries. There is no escape route through devaluation, and firms know this.
§ Fortunately, a sharp fall in inflation is in prospect, and the reforms that we have introduced over the past decade have led to more pay flexibility. Some firms have already deferred pay settlements or agreed pay pauses. The more firms that follow their lead, the sooner we can reverse the trend in unemployment, and start creating jobs again.
§ To sum up, the prospect for the year ahead is for an end to the recession, growth of about 2 per cent. in the 12 months to the first half of 1992, and inflation below 4 per cent. This does not seem to me an umpromising outlook.
§ For the longer term, there is every reason to be optimistic about the United Kingdom in the 1990s. Recessions are always painful, but they are an inescapable feature of market economies—and they are temporary. Longer-term growth depends on having a thriving competitive private sector. That we now have, thanks to the reforms of the past 10 years.
§ If I may confess it, I do not believe in miracles, but I do believe that the right policies, courageously and consistently applied year by year, can produce a transformation in an economy, and that is what happened in the 1980s.
§ So now we can build on real achievements: a record number of new businesses, faster growth in manufacturing productivity than in any major industrialised country, and faster growth in investment than in any of those countries except Japan. These achievements have helped us over the past seven years to maintain our share of world trade, after 30 years of decline. They made the 1980s the first decade since the war when the United Kingdom grew faster than Germany and France.