Commentary

The international currency crisis overshadowed other events in the first half of the period - February to April - generally covered by this Commentary. Sterling remained floating and was little affected at the time, though the effective realignment of currencies will inevitably have repercussions on the pattern of trade and payments. A rapid rise in commodity prices was particularly unwelcome in relation to the Government's statutory policy to counter inflation. The second stage of these arrangements came into effect for incomes on 1st April and for prices on 29th April; the first stage was largely successful, but fresh food prices - which could not be controlled - rose very fast. Economic activity continued to recover strongly, but it was still dominated by the consumer boom, with investment only beginning t o recover, though exports did well. Reports of shortages of components and of skilled labour were more frequent. In the Budget, on 6th March, an unprecedentedly large public sector borrowing requirement was forecast for 1973/74. On 21st May the Chancellor announced cuts in public expenditure programmes, mainly affecting later years. To help finance the borrowing requirement the Chancellor in his Budget announced several measures to make government debt more attractive, including the issue of two stocks with unusual features. The initial reaction of the gilt-edged market to the financing problem was to mark prices down; however, about this time the prolonged rise in short-term interest rates began to be reversed - the revenue season was ending, certificates of deposit had been made less attractive, and excessive wage claims were being successfully resisted - and i n April, after a reduction in the banks' base rates, gilt-edged prices improved. The external trade deficit reached a new peak in March: imports appear to have been bunched, the longer-term benefits to the volume of trade from the sterling depreciation last June had scarcely begun to be felt, and the worsening of the terms of trade was still pronounced. In April, however, the trade figures were more encouraging, and confirmed that the March figures had been subject to erratic influences. The money stock still rose substantially over the period as a whole. In March and April, there were signs of easing in the expansion of bank lending. The building societies came under heavy pressure from borrowing and from withdrawals, but their position began to recover strongly in April.

Commentary