INTERNATIONAL FINANCE SERIES NO. 9 THE UK ECONOMY ONE YEAR AFTER DEVALUATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600010097-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 28
• Document Creation Date: December 22, 2016
• Document Release Date: October 6, 2009
• Sequence Number: 97
• Publication Date: November 1, 1968
• Content Type: IM

Canfidentia
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
International Finance Series No. 9
The UK Economy One Year After Devaluation
Confidential
ER IM 68-147
November 1968
Copy No. 9 .
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
Excluded from oulomolie
dorrngroding and
dedouikolion
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
CONFIDENTIAL
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
22 November 1968
INTELLIGENCE MEMORANDUM
. International Finance Series No. 9
The UK Economy One Year After Devaluation
Summary
On the first anniversary of the devaluation
of the pound sterling, the prospects for the
United Kingdom bringing its external accounts
into balance are not encouraging. A devaluation
of 14.3 percent, bringing the pound to $2.40, was
undertaken last November to stimulate British ex-
ports and depress British imports. While export
growth has met targets, imports have been much
higher than expected, and consequently trade
deficits have persisted.
Prospects for 1968 as a whole are for an
overall deficit in the balance of payments on the
order of $1.4 billion, up considerably from 1967.
The hoped-for payments surplus in the second half
of 1968 will not be realized. The pound sterling
remains a highly vulnerable currency. Lack of
improvement in Britain's trade performance or an
external shock, such as a substantial devaluation
of the franc, could soon lead to great pressure
for a new devaluation of sterling, perhaps with a
new fixed rate being established after allowing
sterling to "float" in the foreign exchange mar-
kets to freely establish its own level. Britain
Note: This memorandum was produced solely by CIA.
It was prepared by the Office of Economic Research
and was coordinated with the Office of Current
Intelligence.
f ')NTPTTIFNTT A T .
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
CONFIDENTIAL
no longer has enough reserves to permit a pro-
tracted defense of the pound.
The failure to hold down imports results
mainly from the failure to keep consumer demand
from rising. The British had hoped through tax
increases and wage restraint to cut real wages
(purchasing power) and personal consumption and
thereby depress the demand for imports. But a
tough austerity budget was not put into effect
until April 1968, four months after devaluation;
during this interim, consumers continued to spend
heavily and imports boomed. Since April the new
taxes have cut into consumer purchasing power,
but imports have not declined from the high level
of the first quarter. in the meantime, there
have been a number of inflationary wage adjust-
ments which have boosted consumer incomes and
hence demand for imports.
Partly because of buoyant world demand, UK
exports have grown rapidly and may benefit further
from the devaluation. While export prices have
fallen in terms of dollars, they have risen some-
what in terms of sterling, in most cases probably
more than costs of production in Britain, which
have also been raised by the higher cost of
imported materials. Consequently, Briti:;h pro-
ducers are making higher profits on most of their
export sales, and this could stimulate investment
in export-oriented industries. Increasing expcrt
capacity would take a long time, perhaps a year,
to be reflected in Britain's trade, however.
In the meantime, continued domestic inflation
could squeeze out the profit edge remaining from
the devaluation. Preventing inflation will not
be easy; labor is likely to resist any. attempts
at a tough wage policy. The loss of work time
through strikes was unusually large this year
and would probably increase further if the govern-
ment tried harder to hold down wages.
The tentative forecast for the British balance
of payments in 1969 is for a surplus, perhaps on
the order of $600 million, and is based on the
~,r%wTT7TT' 1?ATTT A T
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
CONFIDENTIAL
assumption that the growth of exports will con-
tinue apace, while imports will be significantly
slowed. This projection could be upset by a
number of contingencies, including a significant
shortfall in world demand, devaluation of the
franc, the failure of consumer demand in the
United Kingdom to be controlled, or the inability
of the government to restrain wages and prices.
It would be helped by an upward revaluation of
the Deutsche mark, which would improve the com-
petitive position of Britain's exports. Even
the achievement of a substantial surplus in 1969
would not give Britain a respite from balance-
of-payments pressure. Because of the enormous
debt accumulated in the losing battle to defend
sterling at the pre-November 1967 parity,
Britain's surpluses have beer mortgaged in advance
for some time to come.
CONFIDENTIAL
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
CONFIDENTIAL
Background
1. The devaluation of sterling on 18 November
1967 was only one, if the most dramatic, of a
series of measures taken by the British government
to strengthen the balance of payments and thereby
open the way to rejuvenating the sluggish British
economy. Britain's basic problem has been that
its exports did not grow fast enough to earn the
foreign exchange needed to pay for imports, except
at low rates of economic growth. Another problem
has been the low level of official reserve assets
in relation to short-term liabilities to foreigners.
Because of these problems, every post-war boom in
Britain has been cut short prematurely by a
balance-of-payments crisis.
2. To attack the balance-of-payments problem.
the British government since 1964 has taken
following action:
(a) Made an attempt at economic
planning in order to encourage invest-
ment in advanced and export-oriented
industries -- 1964-65.
(b) Imposed a surcharge (a special
tax) of 15 percent on imports intro-
duced on 26 October 1965; revised to
10 percent on 27 April 1956; and re-
moved on 30 November 1966.
(c) Instituted voluntary restraints
on investment flows to non-sterling
area countries -- May 1966.
(d) Froze wages for about a year --
from July 1966 to July 1967.
(e) Tightened credit and raised
interest rates -- at various times
since 1964; most recently in October
of this year, when consumer credit
was tightened.
(f) Imposed a special tax on serv-
ices (a so-called "selective employment
CONFIDENTIAL
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
CONFIDENTIAL
tax") to stimulate a reallocation of
labor to industry.
(g) Devalued the pound 14.3 per-
cent on 18 November 1967.
(h) Planned long-term cuts in
government expenditures, especially
military expenditures -- announcement
on 16 January 1968; general cuts were
primarily for fiscal years 1968/69 and
1969/70 -- with significant military
cuts planned in fiscal years 1969/70-
1970/71.
(i) Introduced the most austere
peace-time budget in decades, involving
a sharp increase in taxes -- April 1968.
(j) Adopted an "incomes policy" to
hold the growth of wages and other in-
comes to 3/ percent over 12 to 18
months -- March 1968.
3. In addition to these measures, the United
Kingdom in defense of sterling borrowed huge sums
from the United States, other European countries,
and international financial institutions. The
net indebtedness resulting from these borrowings
since 1964 requires significant repayments in
dollars before 1971.
4. These were extremely powerful measures.
One trouble was that the measures were scattered
over a considerable time period and were intro-
duced piecemeal in response to recurrent crises
rather than as a part of an integrated package,
so that their effect was greatly weakened.
Britain used most of its international credit
and the Labor Party used up much of its credit
with British labor before the devaluation. The
heavy foreign indebtedness accumulated to defend
the sterling parity has made it far more diffi-
cult to borrow abroad since the devaluation.
The imposition of a wage freeze before the devalua-
tion has made British labor less willing to accept
CONFIDENTIAL
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
CONFIDENTIAL
wage restraint since then. Moreover, the "aus-
terity budget" did not come into effect until four
months after the devaluation, a lag which was
bound to delay and weaken the effectiveness of
the latter measure.
5. In spite of the pre-devaluation efforts,
the UK balance of payments ran deficits eiery
year during 1964-67 (see Table 1). Cumulatively,
the deficit on current account and long-term
capital account combined came to about $4.5 bil-
lion over the four-year period. The various
restrictive measures imposed in late 1964, and
the subsequent wage freeze, reduced the deficit
from almost $2.2 billion in 1964 to about $250
million in 1966. The principal gains came from
a reduction in capital exports and a leveling off
of imports, the latter a reflection of near stag-
nation in output. A resumption of growth in the
domestic economy coupled with the crisis in the
Middle East caused a substantial rise in imports
and a drop in exports in 1967. In turn, these
events gene.-ated a massive speculative outflow of
capital which forced the devaluation of sterling
in November. For the year as a whole, the deficit
on long-term and capital accounts came to $1.3 bil-
lion (#490 million).
6. The devaluation took the pressure off the
pound for only two or three months. The general
loss of confidence in parer money following the
November 1967 sterling devaluation coupled with a
lack of improvement in the British trade position
generated speculation of a new devaluation during
February and March, which did not abate until the
Washington meeting in March that created a dual
market for gold and the announcement about the
same time of an austerity budget in Britain.
Even then, sterling's position remained highly
insecure until a group of the major financial
powers agreed in September 1968 to extend a line
of credit of about $2 billion to Britain as
insurance against withdrawals of sterling assets
by foreign governments (the British in turn guaran-
teed the value of large part of these assets
against any future devaluation). Currently the
pound is still one of the world's weakest major
currencies. It has been driven to its lower
CONFIDENTIAL
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
CONFIDENTIAL
b
a
tw
0
1S
N M
tO
O
1n ul
?"I
to
to
1n c
H
m
I
%~
1
+
r-1
111 ill
to
to
Moo
v
o%
O rn
tO
r-1
M
00
O
0
H a%
to
+
r-I
N r?1
r-I
(
I I
Cl
I
1
r-I
In UI
r-I
N
1`? 1-
M
eN
1*- N
Q1
1-
M r-
O
Ol
w N
I
N
or,-
N
N
+ N
I
'^% ~
4
I
I
I
Ln.
01
N
H tO
O
Oh
r-1 00
~N
c
M
O tp
N
tO
~' N
t0
M
1n
0 IV
M
S
+ 1N
a
1
I
1
1
1
r?1
In d~
N
IN
ra
M
r-1
co
to 00
":V
M
S H
O
+
I
M N
r-4
I
I ri
tj
N
r?i
O
ON 01
01
r-I
S co
t
+
H
0a%
I
+
++
4-,
Fti
N
Mri
00
.
1n rn
Fti
U1
1410)
to
to
N M
r-I
0 co
+
+
1 +
1
?
d' M
tj
O
t0
O
M M
Q1
U1
01 In
-ta
t0
N
~!'
r--I N
r--I
e1'
N ri
01
I
1
I
1
+ 1
.Wm
ro rd w
9 :j r.
Rf U O
-ri
?? .0 r-1 ON
4-I 44 O M a E O
U U U fa w X 0 co
Ul m U ?r1 to H
-P 4J r, 40 9 9 0
a P4 O rtj a 4J ?r W r?1
H ( a b O U f?1 44
r-I 0 r?1 0 Uri f-I 0
U O
a1 m m 0
/1111-TTTTIT~TTT. A T
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
CONFIDENTIAL
support level as a result of the poor October trade
figures and the speculation based on the possi-
bility of revaluation of the Deutsche mark and a
devaluation of the franc. If there should be a
substantial devaluation of the franc, the pound
might have to be devalued again, perhaps after
being allowed to float -- that is, to find its own
level in the foreign exchange markets. If the
German mark is reva.iued upward, the competitive
position of British exports, and hence the posi-
tion of the pound, would be improved.
The Economy: Projections and Performance
7. Shortly after devaluation, the British
treasury forecast a return to surplus in inter-
national payments in the latter part of 1968 and
an annual surplus of $1.2 billion (Z500 million)
in 1969. Achievement of this goal was based on
an expectation of a substantial slowdown in the
volume of imports and a rapid expansion of ex-
ports (see Table 2). The increase in the volume
of imports of goods and services for the first
half of 1968 was to be only 2.3 percent greater
than in the second half of 1967. This was to be
followed by a decline of 1.7 percent in volume
of imports during the second half of the year.
Thus it was hoped that by the second half of 1968,
imports of goods and services would have increased
by only 0.6 percent in terms of constant prices
above those of the comparable period of 1967. A
growth of 13 percent in the volume of exports was
projected for the same period.
8. To enable there massive changes in inter-
national trade and payments to take place and to
provide for continued improvements in later periods,
the British government planned a substantial re-
allocation o:' resources in favor of exports and
investments at the expense of personal consump-
tion. While national product in constant prices
was to grow 3 to 4 percent between the second
half of 1967 and the last half of 1968, fixed
investment was to rise 6 percent and personal
consumption per capita was to decline almost 2
percent.
CONFIDENTIAL
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
CONFIDENTIAL
0
0
.rI
4)
a
U)
0
U
b
N U)
a) 0
U
H
U)
H
A
eT
.ri
a)
0
AI 0I UI
CA M d~
o N rl
+ I I
AI UI 01
00 Ol r-I
r~ C4 V;
+ + +
00 M r-I
N O M
+ + ?~
11.1 1~1 o
AI 011
I
H to t0
~o o cb
+ + +
to
M N l0 -0 4
. to
N ri O ,`! to Ci
+ i + O v
O Sr N
O
C) W O
14 )I rJ
N N
0 0 o tjto
0 N N ?a ?a
l0 co co co W I-1 ?W a
coal we wC ko oA tj 0 0
Wr-1 O' C O%H d fr
H r-1 r-I r-I
r-I 4-I W it
H 44W wry o 0 0
H. to r-4 f-i (a
(U. 'b b
rd .s~ .~ .~ b w ton
0 rd 4J rO I~ t S IS CI
41 0 U) 9: 0 r i 00 a,
0) 0 ?rrl W. 0
0 aa)i
?r1 U) 044 a) U)
W U) V) tj .a
TTTTt VPflV A T
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
CONFIDENTIAL
9. The instruments of this reallocation were
to be the devaluation, increased taxes, and wage
policy. The cost of living was expected to rise
about 5 percent in 1968, whereas the growth of
wages was to be held to 3/ percent. Thus real
wages were to decline, and, with taxes higher,
the decline in consumption was to be even larger.
10. Actual developments have deviated con-
siderably from the government projection.
Industrial production has risen about 3 percent
over last year's level, which implies that the
rate of growth in national product has been
slightly less than planned. But the planned
reallocation of resources away from consumption
has not occurred. Consumption expenditures rose
almost 1 percent in the first half of 1968, com-
pared with the second half of 1967, although a
small decline had been planned. Manufacturing
investment has fallen. Exports of goods and
services have done well -- the increase of 11.8
percent in volume during the first half of 1968
fell only slightly short of the target. But
imports of goods and services have been far in
excess of expectations. Imports shot up during
the first quarter of 1968 and have since remained
at a high level -- some 6 percent above the
equivalent period of 1967. The boom in imports
results mainly from a four-month lag after devalua-
tion in the introduction of the austerity budget
and the failure of import prices to rise as much
as anticipated.
Trends in International Payments
11. The UK balance of payments in the first
half of 1968 -- there are no balance-of-payments
data yet available for later periods -- shows
substantial deficits in both the current and the
long-term capital accounts. The seasonally
adjusted deficit on current and long-term capital
accounts combined totaled some #500 million
($1.2 billion), up approximately 22 percent in
sterling terms and 14 percent in dollar terms
from the large deficit in the second half of
C ONP'TT)FNTTAI.
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
CONFIDENTIAL
1967.* The current account deficit of some
#335 million ($800 million) -- compared with
#320 million ($800 million) for the second
half of 1967 -- is attributable to rapid
growth of imports. and a fall in the surplus on
invisibles from ie 1967 average level. The long-
term capital acc&tint was aggravated by a substan-
tial increase in net outflow of private capital
of about $329 million. However, a single transac-
tion involving investments in the United States
by Royal Dutch/Shell accounted for $211 million of
the total increase.
12. The major element in the international
payments picture for Britain during 1968 has been
the continuation of the large merchandise trade
deficit (see Figure 1). Following a decline from
the unusually high levels associated with the
dock strike of October-November 1967, the merchan-
dise trade deficit did not decline markedly until
August 1968. Optimism grew when the September
returns showed a seasonally adjusted trade
deficit at about the August level, but this re-
newed confidence was seriously shaken by the
appearance of an increased deficit in October.
Indeed, the October performance led to active
speculation against the pound, which (in concert
with other disturbances in international money
markets) drove it to its lowest level in 10 months.
13. Throughout the period since devaluation,
observers have been hard pressed to discern clear
trends in British trade. 11% congeries of disturb-
ing influences has made it difficult to distinguish
when export increases represented sustainable
achievements and when demand for imports was on
the wane. Thus the devaluation itself was under-
taken during a long dock strike, and the effects
of this strike on trade levels tea.ded to depress
the base from which short-term comparisons are
made. The interpretation of import data is con-
founded by a consumer boom in early 1968 that
anticipated the restrictive budget of March.
Subsequent events that upset the interpretation
of British trade returns included the May-June
* Different equivalent dollar values result from
different exchange rates before and after deval-
uation.
CCNFTT)F.NTTAT.
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
CONFIDENTIAL
strikes in France and the adjustment of trade to
the introduction of Kennedy Round tariff cuts.
The Export Performance
14. Devaluation has been followed by a sub-
stantial increase i.n the sterling value of exports.
As is shown in the upper part of Figure 2, the
sterling value r.f UK merchandise exports or the
first half of 1968 was up nearly 13 percent at an
annual rate over tiro full-year performance for
1967. A similar comparison between the first half
of 1968 and the first half of 1967,* however,
shows an advance of closer to 11 percent in terms
of sterling value and only about 4 percent in
terms of quantity. Thus some 7 percentage points
in the advance appear to represent increased prices
for British exports resulting from the increased
costs of imported raw materials, sfforts of ex-
porters to obtain a higher profit, and changes
in the composition of exports. The second of
these factors probably was of considerable impor-
tance in the first part of this year, when it was
still possible to meet some export orders out of
inventories of finished goods or through manufac-
ture from raw materials already imported.
15. in dollar terms, British exports ran at
a lower annual rate in the first half of 1968
than in 1967, indicating that while the quanti-
ties sold increased, there was an even greater
price decline, when exports are measured in
dollars. An exception to this pattern was the
remarkazle growth in exports of miscellaneous
manufactures, a trade category that includes a
wide variety of consumer goods. An early improve-
ment of performance in dollar terms was not ex-
pected, because it was believed that considerable
time would be needed to expand foreign markets
and British output. Nevertheless, by mid-1968
it was still unclear whether Britain would be
able to reverse the steady decline over the years
in its share of exports of manufactures from the
industrial nations (see Figure 2). This long-
term trend has affected the full range of UK
Data adjusted for seasonal factors.
CONFIDENTIAL
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
CONFIDENTIAL
exports of manufactures, which together account
for about 85 percent of total exports.
16. Some heartening signs of significant
improvement in UK exports became apparent in the
third quarter of 1968, as the seasonally adjusted
monthly export data moved up from some #500 million
toward the level of #550 million (see Figure 1).
Available data suggest that this advance was
spread over a broad front of manufactures and was
not restricted to a few commodities (see Figure.3,
which compares monthly exports in 1968 and 1967
for major export categories). One facet of this
improvement was a slight gain -?-- as compared with
earlier years -- in the UK share of the US market
during June-August (see Figure 4).
17. A number of closely related questions
arise out of the British export experience since
devaluation. Foremost among these is the issue
of whether the rapid growth of exports thus far
is primarily attributable to the stimulative
effects of devaluation or is largely the result
of rapid growth of world demand. Import demand
in the UK's principal trading partners (especially
the United States and other developed nations)
appears to have been unusually strong. Thus total
imports and imports by the developed nations grew
in value by 7; and 8h percent, respectively,
between the first half of 19G7 and the first half
of 1968.* Even allowing for some price increases,
it still seems likely that these rates exceeded
the growth in the quantity of UK exports, which
amounted to a little more than 4 percent during
the same period.
18. Two other key questions bear on the use
to which British exporters have-been able to put
the potential, relative price gain from devaluation
* These periods are chosen rather than compar-
ing growth since devaluation in November because
of the unusual depressing effects of the dock
strike on fourth-quarter trade of the United
Kingdom.
CnNFT1lFNTT A T.
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
Figure 1
UK TRADE' BALANCE
NOVEMBER 1967-OCTOBER 1968
700
NOV DEC JAN FED MAR APR MAY JUN JUL AUG SEP OCT
1967 1968
*Includes re-exports.
**Excludes US Military Aircraft.
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
Figure 2
INDEXES OF UK EXPORTS AND UK SHARE OF n-XPORTS*
OF INDUSTRIAL COUNTRIES, 1960-68
ALL DOMESTIC EXPORTS
PERCENTAGE SHARE
---r 20%
Domestic exports
in pounds sterling
Domestic exports
in dollars
1 1
UK SHARE IN EXPORTS OF INDU/TRIAL COUNTRIESe*
1960 1961 1962 1963 1964 1965 1966 1967 1st Qtr. 196 1st Half
INDEX
200 r
MANUFACTURES CLASSIFIED BY
MATERIAL (SITC 6)
1960 1962 19b4 1`Ja0 Qtr Hall Qtr. Half
INDEX 1968 INDEX 1968
240 24% 240 24;
MACHINERY AND TRANSPORT MISCELLANEOUS MANUFACTURING
200 EQUIPMENT (SITC 7) .~ 20% 200 (SITC 8) 20%
160 I I ' ' ~-d 16% 160 I / - 16%
INDEX
20% 200 -
15% 150
10% 100
5% 50
NA NA
1960 1962 1964 1966 lit lit 1960 1962 1964 1966 1st 1st
Qtr. Half Qtr. Half
*Excludes reexports
**The term "Industrial Countries" denotes those countries which were members of the Organization kr Economic Cooperation
and Development in 1967. (Primarily the US, Canada, Japan and Western Europe.)
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
Figure 3
MONTHLY UK EXPORTS* SINCE DEVALUATION COMPARED WITH THOSE
FOR THE SAME MONTHS OF THE PRECEDING YEAR
NOVEMBER 1967 -SEPTEMBER 1968
INDEX
14o r
MANUFACTURES CLASSIFIED
BY MATERIAL (SITC 6)
20
00
90
too XPOR VEL I SAME
MO tl OF P 4CEDIN d EAR
Nov Dec Jan Feb Mar Apr May Jun Jul Aug
1967 1968
INDEX
,qu
20
00
Nov Dec
1961
MACHINERY AND TRANSPORT
EQUIPMENT (SITC 7)
30
OLLA
60. I I . 1 I I 1 1 1 1
NOV " DEC JAN FEB MAR APR MAY JUN JUL AUG SEP
1967 1968
INDEX
CHEMICALS (SITC 5)
Jan Feb Mar Apr May Jun Jul Aug
1968
Apr May Jen Jul
1968
MISCELLANEOUS MANUFACTURES
(SITC 8)
20
00
80
fin
Nov**
Dec Jan Feb Mar Apr May Jun Jul Aug
1967 1968
"Data exclude reexports.
"Dollar trod" data for November not directly comparable to sterling series.
Nov Doc Jan
1967
INDEX
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
Figure 4
UK SHARE OF US IMPORTS
NOVEMBER-SEPTEMBER PERIODS, 1965-68
PERCENTAGE SHARE
9 r----
5
NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
CONFIDENTIAL
of the pound.* The first of these is whether the
stimulative effects of devaluation are to be
achieved principally through increased profits
to the British or reduced prices to foreign
importers of their goods. The second relates to
how long devaluation will take to yield the
desired substantial improvements in Britain's
export performance compared with that of other
countries. Fragmentary evidence suggests that
the prices of key British exports were competi-
tive before devaluation and that greater profits
will play a more important long-run role than
lower prices in increasing British exports. A
large share of British exports is made up of
machinery, transport equipment, and other sophis-
ticated manufactures for which considerations
other than price exert an important influence on
sales. There is also some limited indication
that the level of labor costs in key manufacturing
industries in the United Kingdom is higher than in
most other industrial countries and that comparable
export profits were correspondingly lower before
devaluation. Increased UK competitiveness in world
markets will take longer if it comes through in-
creased export profits than if it derives almost
exclusively through decreased export prices. The
long-run gains in competitiveness from increased
profits for British exporters will come from ex-
pansion of productive capacity in exporting indus-
tries and from increased export marketing and
related services abroad. It is hoped that the
favorable effects of either increased profits or
decreased export prices derived through devalua-
tion will not be erased by more rapid increases
in British prices or labor costs than in competing
countries. Although data are scarce, it does not
appear that to date labor costs have risen signifi-
cantly faster in Britain than in other major indus-
trial countries.
* The potential gain is c'nsiderab1y less than
the full amount of devaluation because of the
high import content of UK exports and various
other factors. Thus initial, estimates pointed
toward some 7 percentage points remaining for
price decreases or proj'z.t increases from the
14.3 percent deval.uat on.
(`.0M1PTTI1PNTTAT.
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
CONFIDENTIAL
The Import Performance
19. The behavior of British imports since
devaluation has surprised many observers. Although
a decline in the quantity of imports wFs not ex-
pected, the actual rate of increase considerably
exceeded expectations, especially during the
first part of 1968. The value of imports at an
annual rate for the first nine months of 1968 was
up almost 20 percent in sterling terms and 5.5
percent in dollar terms above that of 1967.
Moreover, the quantum index of imports had grown
by more than 7 percent from November 1967 through
August 1968. While the big jump occurred during
the first quarter, there is evidence of a renewed
growth in imports since June.
20. The rapid growth of imports in the first
half of 1968 is a continuation of a secular trend,
in which imports increased at an average annual
rate of 6 percent during 1961-67 (see Figure 5).
Although total UK imports have grown less rapidly
than those of all industrial countries, UK im-
ports of manufactures have grown faster (see
Figure 6). The slow growth of British industrial
production, while holding down the demand for
imported raw materials, has tended to divert con-
sumer and investment demand to imported manufac-
tures. The fact that manufactured goods have
significantly led overall increases in UK imports
is apparent in the comparison of monthly imports
during the first six months of 1967 and 1968
(see Figure 7).
21. Consumer spending continued to grow
rapidly from devaluation through March because
the principal restrictive measures did not take
effect until April. Indeed, earlier announce-
ments of forthcoming fiscal constraints served
only to spur the consumer boom. Imports, for
which there was already some pent-up demand as
the result of the dock strikes, surged forward
with the general increase in consumer spending.
In addition, high levels of public spending before
the start of the new fiscal year exerted an upward
pressure on imports. An important element in the
7 percent advance in the quantum index of imports
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
Figure 5
shed manufactures and
classified items
non-
*Index for 1968 is based an seasonally adjusted data for first three quarters of year.
COMPOSITION OF UK IMPORTS, 1967
SITC 8 and 9)
C:ROWTH AND COMPOOSIVION OF UK IMPOkTS, 1961.68
INDEX
200 r
STERLING INDEX
Manufactures largely for further macninery ana Transport tquipment
processing (SITC 5 and 6) (SITC 7)
13.5%
24.996
Food, Beverages, and T
27.4%
(SITC 0 and 1)
7.2~
11.318
13.7%
Fuels (SITC 3)
Basic Materials (SITC 2 and 4)
75112 11.68
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
GROWTH OF UK IMPORTS, 1961-68
1 c.i.f.)
obacco
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
Figure 6
INDEXES OF UK IMPORTS AND COMPARABLE IMPORTS
OF INDUSTRIAL COUNTRIES', 1962-68
INDEX
200
TOTAL IMPORTS
1963 1964 1965 1966
*The term "Industrial Countries" denotes those countries which were members of the
Organization for Economic Cooperation and Development in 1967.
(Primarily the IIS, Canada, Japan and Western Europe.)
"Index computed on the basis of dollar values.
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
Figure 7
MONTHLY UK IMPORTS SINCE DEVALUATION COMPARED WITH THOSE
FOR THE SAME MONTHS OF THE PRECEDING YEAR
NOVEMBER 1967 - SEPTEMBER 1968
TOTAL IMPORTS (c.i.f.)
NOV? DEC
1967
APR MAY
1968
ERLING INDEX 1
D LLAR INDEX
MACHINERY AND TRANSPORT
EQUIPMENT (SITC 7)
INDEX
350r
ou Nov* Doc Jon Fob Mar Apr May Jun Jul Aug Nov* Dec Jon
1967 1968 1967
INDEX
350r-
200 n
CLOTHING (SITC 84)
50 Nov* Dec Jon Feb Mar Apr May Jun Jul Aug
1967 1968
too-IMPORR BEVEL IN $AME -YEAR
MONTH OF PRECEDING
hl II II I
DOMESTIC ELECTRICAL EQUIPMENT
(SITC 725)
MISCELLANEOUS MANUFACTURED
ARTICLES (SITC 89)
50 Novo Dec Jon Feb Mar Apr May Jun Jul Aug
1967 1968
*Dollar trade data for Noven,ber not directly comparable to sterling series.
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
CONFIDENTIAL
between November and March was the failure of im-
port prices to rise as much as anticipated. Thus
import prices rose only about 10 pe:cent from
October 1967 through June 1968, compared with a
projected increase of 12 to 13 percent for the post-
devaluation period. Probable reasons for the failure
of import prices to rise by the extent anticipated
include price cuts by overseas suppliers to meet
competition and the significant share of goods
coming from countries that also devalued.
22. Prospects for imports in the remainder of
1968 are difficult to gauge. The unit-value index
for imports has remained steady since March, sug-
gesting that the price increases resulting from
devaluation are largely exhausted. A high rate of
consumer spending was evident into November. On
1 November 1968 the government enacted new consumer
credit restrictions intended to achieve substantial
reductions in consumer spending on durables. Late
in November the government indicated that it was
contemplating additional mo;ci-a.ry and fiscal measures,
including reduction in bank credit and a 10-percent
increase in the purchase tax on a wide variety of
consumer goods. A major wage settlement in November
within the engineering industry raised the possi-
bility of increasing difficulty in constraining
increases in money incomes. Together, these develop-
ments suggested that significant reductions in con-
sumer spending and imports probably will not be
achieved in 1968 and will require stringent govern-
ment policies well into the first half of 1969.
The Balance of Payments in 1968 and 1969
23. Initial projections of a return to surplus
in the balance of payments during 1968 were clearly
too optimistic. Prior to the announcement of the
large trade deficit for October, revised estimates
for 1968 called for an overall deficit in the balance
of payments of about #575 million ($1.4 billion).
Even this revised estimate will probably prove too
favorable, however, for it depended heavily on a
strong improvement in the merchandise trade account
for the fourth quarter. The cumulative balance on
the current and long-term capital accounts for the
first and second quarters of 1968 (see Table 3)
CONFIDENTIAL
Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010097-4
'dr Co 10 0
01 t0 NO
r-1 + r-i r-1
O t0 qw r-1
O r-I CO
M + N M
I I I
to CO t` to
tON mco
+ m N
I I 1
O r-I ri N
Vr l~ r-1 O
1 I r-I N
I 1
0) to ON
O to to t-I
r-I + 1 +