Chapter 5 Economic Developments in the Industrial Countries
- International Monetary Fund
- Published Date:
- September 1964
Late in 1962, trends in industrial production in many countries were uncertain, and early in 1963 those in Europe were obscured by the effects of the unusually severe winter. It soon became apparent, however, that the economic expansion observed earlier was continuing with renewed vigor in a majority of countries. Even those countries in which the rise in output had been limited in 1962—particularly Japan and the United Kingdom—took part in the general upward movement in the industrial countries that characterized 1963.
In most countries, the main impetus to the expansion originated in the countries themselves. It came, in particular, from the lift to consumption provided by wage increases and the stimulus to private investment resulting from continued expansion and favorable prospects for further growth; in some countries, budget deficits and other fiscal measures were also important. These influences were generally much more powerful in raising demand than was the impact of foreign transactions. However, the high degree of freedom for international payments that prevails in the industrial countries results in economic impulses being easily transmitted from country to country, and this undoubtedly helped to make the expansion of output general and to even out rates of progress. A rapid rise in imports in those countries which were less successful than others in controlling pressures on prices and wages served both to transmit excess demand to other countries and to bring about major changes in the payments positions of individual countries. In addition, short-term and long-term capital outflows from the United States, including the continuing U.S. direct investment in the other industrial countries, served to reinforce the domestic forces pushing for expansion in the recipient countries.
The continued prosperity in all the industrial countries contributed to an increase in the volume of imports from the primary producing countries and to the general rise in prices for primary products that occurred in the course of 1963 and continued in early 1964. These developments, and their impact on the export earnings and balance of payments positions of primary producing countries, are reviewed in later chapters.
Output, Employment, and Wages
The progress in the industrial countries took place against differing economic backgrounds. Efforts to solve the United States’ two major problems, substantial unemployment and balance of payments disequilibrium, were continued and intensified in 1963. Business activity expanded appreciably, the gross national product at constant prices rising by 3.8 per cent and industrial production by 4.8 per cent from 1962 to 1963 (Chart 5). Nevertheless, little success was achieved in reducing the unemployment rate, which fluctuated between 5.5 per cent and 5.9 per cent over the year, and was on the average about the same as in 1962. The high level of unemployment helped to limit the increase in wages to less than 3 per cent on the average (Chart 6). This relative stability of wages at a time of expansion of output resulted in little change in wage costs (Chart 7). In the first months of 1964, there were signs that unemployment was declining, as the expansion, spurred by a cut in income taxes, gained new momentum. In May, the percentage of the labor force unemployed was lower than it had been for four years.
Chart 5.Selected Areas and Countries: Industrial Production, Seasonally Adjusted, 1961–April 1964 Chart 6.Selected Areas and Countries: Wage Rates, 1961–April 1964 Chart 7.Selected Countries: Wage Costs Per Unit of Output in Manufacturing, 1961–First Quarter 1964
There was also a marked expansion of activity in Canada. The gross national product at constant prices rose by 4½ per cent during 1963. In the last quarter of the year, unemployment declined to approximately 5 per cent of the labor force on a seasonally adjusted basis, compared with close to 6 per cent in the same quarter of 1962. Despite the upward movement in the economy, wages were relatively stable, average money rates rising by approximately 3½ per cent during the year. Labor productivity rose by almost 2 per cent. As a consequence, wage costs rose only slightly.
At the end of 1962, the United Kingdom was in the midst of a recession, the unemployment rate for Great Britain being 2.5 per cent—a high level for that country. Owing partly to this recession, the balance of payments on current account had improved in 1962, and in 1963 the authorities considered it appropriate to intensify their expansionary financial policies, while keeping a close watch over the balance of payments. The rise in gross national product and industrial production acquired increased momentum during the year, production being some 8 per cent higher in the fourth quarter than in the corresponding quarter of 1962. Partly because of the severe winter, unemployment increased in the early part of 1963, but by December it had fallen to 2 per cent. The pace of expansion was made possible, to a considerable extent, by bringing into use underemployed productive resources, and was faster than could be sustained over a prolonged period. During the year, the average growth of incomes was rather above the range of 3-3½ per cent annually that was the Government’s objective. However, average wage costs per unit of output appear to have fallen in the United Kingdom by approximately 1 per cent over the year.
In continental Western Europe, the rises in output were in general not so dramatic as in North America and the United Kingdom. In the Federal Republic of Germany, domestic demand rose less rapidly than it had in earlier years. This contributed to a decline in growth, caused primarily by the slowness of the rise in the labor supply and by adverse weather conditions early in 1963. The gross national product, at constant prices, rose by approximately 3 per cent over 1962, compared with an increase of more than 4 per cent from 1961 to 1962. One sign of the lesser tensions in the economy in 1963 was that hourly wage rates in industry rose by 7 per cent, compared with more than 10 per cent in each of the years 1960-62. However, in the course of 1963 the economy was moving into higher gear, mainly under the impact of inflationary pressures spilling over from other European countries. These pressures were an important cause of the 10 per cent rise in exports and the re-emergence of a balance of payments surplus. Demand pressures were further intensified early in 1964.
In France, the expansion in effective demand continued, and was facilitated by an abundant supply of domestic credit and an inflow of capital from abroad. Real output was about 4-5 per cent higher in 1963 than in 1962, although its rate of growth slowed down. The inflationary tendencies that were already apparent in 1962 were intensified. Because of the limited supply of labor, wage rates rose appreciably in 1963. The increase, 8.5 per cent, was about the same as in 1962. Such an increase exceeded the rise in productivity and was one factor behind the increase in industrial prices. The strong demand pressures in the economy led to a reduction in the balance of payments surplus in the course of the year.
Inflationary pressure was, however, most apparent in Italy. The extent of the inflation was, in part, reflected in the sharp reversal of the current account of the balance of payments—from a moderate surplus in 1962 to a large deficit in 1963. There was also a considerable rise in the general level of prices. Demand factors (particularly the demand for consumer goods) were strongly expansionary. The excess supply of labor, which in the past had been instrumental in permitting both a rapid economic expansion and a remarkable degree of price stability, was further reduced. The pressure of the demand for labor, in conjunction with the operation of the sliding-scale mechanism which links wage rates to the cost of living, raised wages by more than 12 per cent. This was much more than the concurrent gain in productivity; wage costs per unit of output appear to have risen during the year by more than 10 per cent.
An ample supply of credit contributed to these developments. Bank credit, which had increased substantially in 1962, rose again, by about 20 per cent, in 1963. The rate of expansion, however, slowed down considerably as the result of a restriction of credit by the Bank of Italy, initiated in May 1963. This became progressively more severe during the second half of the year. Italy’s economic policy, though concerned with the need to maintain both a satisfactory rate of economic growth and price stability, has been hampered over the past two years by a number of adverse factors. These have included political uncertainties, poor harvests in both 1962 and 1963, and a crisis in confidence, which led to a large outflow of private capital. A main consequence of internal inflation under these conditions has been a substantial balance of payments deficit, financed in part by a reduction in the ample foreign exchange reserves held by the Italian authorities. The rate of growth of real output continued to decline, reflecting the tight supply situation, but the gross national product in real terms was about 5 per cent higher in 1963 than in 1962.
In recent years, demand pressures in Belgium have been weaker than in most countries in Europe. In fact, Belgian export prices were, on the average, about 1 per cent lower in 1963 than in 1958. Partly owing to reduced steel prices, Belgian exports made substantial gains in 1963, showing one of the highest rates of increase in the industrial world during that year. This powerful stimulus from external demand, together with large increases in government and private consumption expenditure and a less extensive increase in private investment, led to a pronounced rise in over-all demand in 1963. Employment was already full, and wages rose by 8.1 per cent between December 1962 and December 1963, or considerably more than productivity.
Throughout 1962, Sweden was following expansionary policies in anticipation of an expected weakening of foreign demand for the products of the engineering industry and a leveling off in industrial investment. However, there was in fact an increase in the demand for Sweden’s exports of manufactured goods and forestry products, so that a marked expansion in the economy was induced. Industrial production rose by 6 per cent between the fourth quarter of 1962 and that of 1963. Wages rose by more than 7.5 per cent. To cope with the new situation, policies were reversed during the year.
In Switzerland, business activity expanded strongly during 1963 (although less than in 1962), being stimulated by a rising foreign demand for Swiss goods and by increases in the domestic components of the gross national product, financed to some extent by the continuing inflow of foreign capital. While all sectors shared in this upswing, which followed the severe winter, boom conditions were particularly pronounced in the building industry. Expanding demand intensified pressures in the labor market, inasmuch as the supply of labor did not increase commensurately—in part, because of measures taken by the authorities to slow down the influx of foreign workers. Wages rose appreciably; in the third quarter of 1963, they were 5.1 per cent higher than they had been in the last quarter of 1962.
Wage policy in the Netherlands has been shaped in the interests of price stability and full employment, and in order to maintain a strong competitive position in the long run. For these purposes the Netherlands tried, and for a protracted period succeeded, in limiting the increases in its wage levels to smaller proportions than those of neighboring countries. This was considered of primary importance because of the great dependence of the Netherlands economy on international trade. The policy encountered increasing difficulties as full employment was reached and maintained for a number of years, business activity continued to expand, and a rising number of Netherlands workers was attracted by employment abroad. Collective bargaining agreements in the Netherlands have provided since 1960 for substantial increases in workers’ pay; in addition, considerable amounts of “black wages” have been paid. During 1963, the rise in wage rates was moderate. However, in October, labor and management agreed that, in 1964, wages would be raised by two steps of 5 per cent each, and could even be increased by a further 4 per cent in individual enterprises under certain conditions. The Government has approved this agreement, together with 12 per cent increases in social security benefits and salaries of state employees. The gap between Netherlands and other European wages will thereby be largely eliminated. For the year 1964, wage costs per worker are expected to be some 15 per cent higher than in 1963.
Of all the industrial countries, the advance in activity was most dramatic in Japan. During 1962, the economy had passed through a period of readjustment, marked by a slowing down of business activity, which permitted, however, a significant improvement in the country’s balance of payments position. This enabled the Government and the monetary authorities of Japan to relax the restrictive policies which they had adopted earlier. The relaxation, begun in the last quarter of 1962, was continued in the first half of 1963. In the course of 1963, the pace of economic activity accelerated substantially, industrial production rising by about 19 per cent between the fourth quarters of 1962 and 1963. Wages, however, rose by more than 11 per cent between the second half of 1962 and the second half of 1963. This sign of renewed strong inflationary pressure, among others, led the authorities to adopt less expansive policies as the year progressed.
The wage increases referred to in preceding paragraphs were probably the principal factors underlying price trends during 1963. However, in the United States and Canada, the continued existence of relatively high levels of unemployment and excess capacity limited the scope of the increases in wages and in prices. Wholesale prices were unchanged in the United States and rose by 2 per cent in Canada, while the cost of living rose by less than 2 per cent in both countries (Charts 8 and 9). In the United Kingdom, also, the moderation of the rise in incomes over most of the year probably accounts for the fact that the increases in wholesale prices and the cost of living were of the order of no more than 2 per cent, despite a rise of 6 per cent in import prices during the course of the year. In much of continental Western Europe, prices and wages moved closely together. In France, Italy, and the Netherlands, wholesale prices and the cost of living both rose by more than 5 per cent during the year, and in Sweden they rose by 3-4 per cent. On the other hand, in Belgium and the Federal Republic of Germany more rapid improvements in productivity, reductions in profit margins, or other factors of a special character, resulted in comparatively small changes in prices. Wholesale prices rose by approximately 1 per cent in Germany, and the cost of living by about 3 per cent in both countries. The marked wage increases in Japan were associated with a relatively small increase (3 per cent) in wholesale prices but a rather large rise (7 per cent) in the cost of living.
Chart 8.Selected Areas and Countries: Wholesale Prices, 1961–April 1964 Chart 9.Selected Areas and Countries: Cost of Living, 1961–April 1964
Despite the marked increases in most domestic prices and wage costs, export prices remained remarkably stable in the industrial countries during 1963 (Chart 10). Only in France, Japan, and the United Kingdom did the over-all index of export prices rise by as much as 3 per cent or more. This stability of export prices was a product of declines, or relative stability, in export prices of manufactures, together with somewhat larger increases in the export prices of other goods, which rose with the general rise in the prices of primary products. Export prices of manufactures fell, for example, in the Federal Republic of Germany and in the United States, and were unchanged in France and Japan. This may imply involuntary cuts in profits to maintain or expand sales in foreign markets, especially in the countries where inflationary pressures have been strong. In any event, the countries in question may have good reason to be concerned about their export capabilities in the future in the face of rising wage and other costs, and also about maintaining investment in their export industries at adequate levels despite the diminishing possibilities of self-financing. In particular, costs are rising in some of the countries experiencing inflation, while they tend to remain constant or to decline in some of the important countries (notably the United States and the United Kingdom) which have had persistent balance of payments problems. This disparity may lead to marked changes in the relative competitive positions of individual countries, and in the structure of international trade. This subject is further discussed in a Supplementary Note, page 123.
Chart 10.Selected Areas and Countries: Export Prices, 1961–April 1964
In conducting their financial policies in 1963, a majority of the industrial countries gave more emphasis to domestic objectives than they had for several years past. In the course of 1962, two countries—the United Kingdom and Japan—had strengthened their balance of payments positions, thereby reducing appreciably the balance of payments risks involved in expansionary policies. In the United States, the continued success in maintaining price and cost stability, during a period of sustained rises in costs in most of the other industrial countries, had also enhanced the prospect of avoiding undesirable international repercussions of policies aimed at stimulating growth. The continued reduction in 1963 of the balance of payments surplus of continental European countries tended, on the other hand, to lessen the risk that policies aimed at containing upward pressures on prices and costs would aggravate the international payments problem. In the course of the year, these countries tended to give more attention to stability than to the stimulation of growth, as it became apparent that the world economy had entered a strongly expansionary phase.
Early in 1963, the main industrial countries were still following policies directed toward the stimulation of output. Central bank discount rates were reduced in January in the Netherlands, Sweden, and the United Kingdom (Chart 11). The reduction in the bank rate in the United Kingdom served to lower some rates which are important determinants of domestic activity (e.g., clearing bank overdraft rates). At the time the bank rate was lowered, the Bank of England announced that loans to the discount market might in future be made, on occasion, at a rate of interest higher than the bank rate. Accordingly, on March 19, 1963, the Bank charged ½ per cent above the bank rate on loans to the market; this served to keep market rates that exert influence on international capital movements (e.g., Treasury bill rates) closer to the bank rate.
Chart 11.Selected Countries: Central Bank Discount Rates, 1961–April 1964
The downward trend of rates continued until June 1963, the Japanese discount rate being reduced in March and April, and the Canadian rate in May. However, since mid-1963, the trend has been reversed. In the major deficit countries, the reversal of policy has been aimed primarily at protecting the balance of payments; in other countries, primarily toward containing domestic demand pressures. The Swedish discount rate was raised in June and those in the United States and Belgium in July. Since then, an upward drift has continued, the Canadian rate being raised in August, the Belgian rate in October, the French rate in November, the Netherlands and Swedish rates in January 1964, the U.K. rate in February, and the Japanese rate in March. However, in the United Kingdom, Treasury bill rates did not rise as much as the bank rate in February, so that the structure of rates in that country has returned to a more traditional pattern. By the end of the first quarter of 1964, central bank discount rates in the main industrial countries were generally higher than they had been for five years.
While discount rates were edging upward, the authorities were supplementing them with other policies of monetary restraint. In the United States, excess reserves of the member banks were reduced from an average of $550 million in the last quarter of 1962 to one of $450 million in the last quarter of 1963; in the first quarter of 1964, this average was further reduced by $60 million. Free reserves (i.e., excess reserves minus borrowing from the Federal Reserve Banks) fell from an average of approximately $385 million in the last quarter of 1962 to approximately $110 million in the last quarter of 1963, and rose only slightly in the first four months of 1964. As a further encouragement to rising short-term rates, the limits on interest payable on time deposits were raised to 4 per cent for all maturities. Previously, the limit for deposits maturing in 90 days to 6 months had been 2½ per cent, and that for deposits from 6 months to 1 year had been 3½ per cent.
In France, the liquidity ratios that the banks are required to maintain were raised from 32 per cent to 35 per cent early in 1963 and to 36 per cent in September. Upward pressures on short-term rates in France were somewhat tempered by a decree that the banks’ minimum rates, which are usually changed in accordance with the discount rate, would be raised by only ¼ per cent at the time of the November increase in the discount rate.
In Italy, the Bank of Italy took steps to reduce its rediscounts for, and advances to, the banks. These institutions were also requested to restrain their borrowing from abroad, and, eventually, to hold such liabilities at or below specified levels (originally that at the end of August; later that at the end of November or December, whichever was the lower).
In Sweden, the Sveriges Riksbank introduced in February 1964 a penalty rate of 9 per cent (compared with the discount rate of 4½ per cent), applicable on advances to banks in excess of one half of their capital and published reserves. In April, this penalty rate was made applicable, for those banks that did not observe the recommended liquidity ratios, to advances to them in excess of one fourth of their capital and published reserves.
The Bank of Japan lowered its ceilings on rediscounts for, and advances to, banks; in December, it doubled the reserve requirements for demand deposits with commercial banks and certain other financial institutions.
The major exception to this general tendency to apply more traditional monetary instruments in a rather restrictive manner was in the United Kingdom, where the Bank of England suggested to the clearing banks that it would not object to a lowering of their liquidity ratios from 30 per cent to 29 per cent in March 1963, and to 28 per cent between September 1963 and April 1964.
More direct measures were also taken to restrict the availability of bank credit. In February 1963, the Bank of France requested the commercial banks to limit the increase in their credit to private business to 12 per cent during the ensuing year. In September, this limit was reduced to 10 per cent. In Italy, the banks were asked to restrict credit to large enterprises. In October, the Netherlands Bank reintroduced its system of credit ceilings, which had been discontinued in January. Between September and December, the increase in credit extended by each commercial bank to the private sector might not exceed more than 4 per cent of the average credit outstanding during the first half of the year. In January 1964, the Bank prescribed that over the period January to April such credits should not exceed by more than 5 per cent the average outstanding a year earlier. In January 1964, the National Bank of Belgium recommended to the commercial and savings banks that they reduce the rate of expansion of credits extended to the private sector in 1964 to approximately half their rate of growth in 1963. In Japan, the commercial banks were requested to restrict the increase in their loans in the first quarter of 1964 to slightly less than 3 per cent of the amount outstanding at the end of 1963.
In the Federal Republic of Germany, the Bundesbank acted to immobilize part of the increase in liquidity accruing to the banks from an inflow of foreign funds. From April 1, 1963, the minimum reserve requirements on foreign deposits with the banks were increased to the legal maximum rates. Payment of interest on foreign time deposits has been prohibited. Finally, to encourage an outflow of funds and hence to limit the increase in domestic liquidity arising from the balance of payments surplus, the Bundesbank reopened its swap arrangements with the commercial banks. However, official forward cover is now granted only for bank holdings of U.S. Treasury bills, instead of for all dollar holdings (including Euro-dollars), as previously.
In several countries, monetary policies were also implemented by active debt management operations. In the United States, the volume of all issues maturing in less than five years was reduced by refunding operations, although the total of Treasury bills outstanding increased by an amount equal to about two thirds of the Federal Government’s cash deficit. At the same time, the $5 billion net increase in holdings by the Federal Reserve Banks and the U.S. Government investment accounts was almost entirely reflected, on a net basis, in increased holdings of Treasury bills and other securities maturing in less than one year. While from time to time during the year substantial official purchases were made of longer-term securities, on balance the changes in official holdings in the various maturity ranges over one year were mutually offsetting. At the same time, the amount of short-dated securities held by nongovernment sectors declined during the year. These changes were markedly different from the pattern in 1962, when the increases in the holdings of official agencies were concentrated in securities with longer maturities. In both 1962 and 1963, the authorities desired to avoid increasing long-term interest rates and to let short-term rates rise. For 1963 as a whole, it was felt that the short-term interest rate objective could be met adequately through the monetary policies followed, even though net purchases of a substantial volume of Treasury bills by the authorities tended to keep short-term rates from rising as much as they might have done under the impact of the general monetary policies which were followed. The actions of the commercial banks in disposing of short-dated securities partially offset the increase of $16 billion in credit to the private sector, at a time when savings and time deposits were expanding more than demand deposits and the interest rates on savings and time deposits were rising.
Long-term capital inflows were sufficient to cover Canada’s balance of payments deficit on current account through its period of seasonal weakness early in the year, and the Bank of Canada’s operations were geared to some further easing of credit conditions. During April and early May 1963, the Bank cushioned a rapid rise in the prices of long-term bonds by selling on a considerable scale, while continuing its policy of easing credit conditions through acquisitions of Treasury bills and other short-term issues. After mid-May, the Bank was an intermittent buyer of long-term issues as the market weakened, but it became more active during the first two weeks of July when, in anticipation of a rise of interest rates in the United States, further signs of weakness appeared. There was a sharp drop in Canadian bond prices following the announcement of the U.S. Government’s proposed interest equalization tax. Prices recovered after it was announced that the new legislation would authorize the exemption of new Canadian issues. In August, however, the prices of both long-term and short-term issues began to fall again, leading to an increase in the bank rate on August 11. The Bank of Canada was inactive in the long end of the market after that date.
In the United Kingdom, also, the authorities markedly changed their pattern of borrowing. In 1962, the Government borrowed more than its net requirements on longer-term issues and redeemed Treasury bills. In 1963, its net borrowing requirements were smaller than the financing available from the issue of currency and nonmarketable securities, yet it made small net issues of Treasury bills and redeemed more than £125 million of longer-term issues.
In France, the reduced government deficit was largely financed by long-term, rather than short-term, borrowing. For the first time since 1958, the Government decided to float long-term loans. Two loans, totaling F 3 billion, were fully subscribed in 1963, as was a further issue in March 1964. The Netherlands also followed a debt management policy which reduced the liquidity of the economy and thus inflationary pressures. The Government’s fixed domestic debt was increased by almost f. 1 billion, which was more than sufficient to cover the f. 310 million redemption of foreign currency debt and the Government’s cash deficit of f. 270 million. In Sweden, the interest rate fixed by mortgage institutions in August on two new issues was ¼ per cent higher than the previously prevailing rate of 5¼ per cent. The National Debt Office issued in January 1964 a 16-year government bond loan yielding 5¾ per cent, and in March a 3-year bond issue at 6 per cent.
Measures to Influence International Capital Movements
As noted, the authorities in the United States wished to see short-term rates rise while long-term rates remained essentially stable, their aim being to discourage the outflow of interest-sensitive funds, while avoiding an increase in the cost of capital for domestic investment. Considerable success was attained in achieving this double objective. There was a rise during 1963 of approximately ¾ per cent in the yields on practically all money market paper traded in New York, and at the same time a very small decline in the rates charged on practically all bank loans to business. To keep long-term rates that were low by international standards from encouraging a capital outflow, an attempt was made to establish differential long-term interest rates for domestic and international borrowing in the United States. The Administration proposed that the Congress enact an interest equalization tax which, in effect, would raise the cost of U.S. capital to some foreign borrowers by the equivalent of 1 per cent per annum. The tax would be retroactive to August 1963. It was proposed, however, to exempt from the tax all direct investment, new issues by borrowers in the less developed countries and Canada, and certain other transactions. The Administration has also requested congressional approval for further tax relief on income from new direct investments in the less developed countries.
Chart 12.Selected Countries: Short-Term Interest Rates, 1961–April 19641
1 For Canada, the Netherlands, the United Kingdom, and the United States, three-month Treasury bill rate; France and Switzerland, call money rate; Germany, discount on the Bundesbank’s sales of three-month Treasury bills.
In the United Kingdom, the change in the Bank of England’s policies vis-à-vis the discount market was also intended to effect an improvement of the capital account of the balance of payments. It amounted to raising the return to foreign lenders on the short-term market without raising costs for a large part of domestic short-term borrowing.
In several European countries, measures were taken to discourage an inflow or to encourage an outflow of private capital. In the Federal Republic of Germany and Switzerland, direct prohibitions on the payment of interest on short-term deposits by foreigners, and on the sale of short-term securities to them, were continued or extended. In Germany, where there was a large inflow of capital invested in bonds, it was agreed early in February 1964, with the banking consortium for bonds of the Federal Republic and of its specialized agencies, that the right to subscribe to new issues of such bonds would in certain cases be reserved for a limited period of time to German residents. The Bundesbank has also prohibited payment of interest on time deposits made by nonresidents, and has raised reserve requirements on foreigners’ deposits to the legal maximum. Furthermore, the German Government has asked for legislation to impose on nonresidents a 25 per cent withholding tax on income from fixed-interest securities issued by German residents. In order to induce German nationals to invest abroad, a law has been passed granting various tax incentives for investments in less developed countries, and a bill has been submitted to Parliament which would abolish the 2½ per cent tax now levied on bond issues and domestic and foreign share issues.
Chart 13.Selected Countries: Long-Term Government Bond Yields, 1961–April 1964
In France, payment of interest on nonresidents’ deposits has been prohibited. It has also been decreed that French residents may not borrow abroad without authorization from the Bank of France unless the loans are for F 1 million or less, are granted for no longer than two years, and bear interest at no more than 4 per cent. The corresponding limits previously in force were F 2 million, five years, and 5 per cent, respectively. Further, the Finance Ministry has subjected to advance notification all “secondary offerings” (i.e., negotiated sales of large blocks of securities at prices different from ruling market quotations) of French shares to foreign interests. This step was aimed at enabling the authorities to supervise foreign direct investment in French enterprises.
Chart 14.United Kingdom: Term Interest Differentials, 1963–April 1964
In response to general market pressures in the expanding national economies, as well as to the policies followed by national authorities, interest rates have moved upward over the last 12 months. Generally, however, short-term rates (Chart 12) have risen more than long-term rates (Chart 13). The range between the lowest and highest monthly average long-term yields during 1963 was less than ½ per cent in all the main industrial countries except Belgium (0.62 per cent), Italy (0.65 per cent), and the Netherlands (0.60 per cent). On the other hand, the comparable variations in short-term rates were in excess of ½ per cent, except in the United Kingdom (0.32 per cent) and the Federal Republic of Germany, where the Bundesbank reduced the yields applying to its sales of 18-month and 20-month securities. Short-term yields in the first quarter of 1964 rose by more than 1 per cent in Belgium and, after increases in the central bank discount rates, by more than ½ per cent in the Netherlands and the United Kingdom.
The rather sharp movements in short-term rates tended to produce not only an upward shift in their general level but also greater uniformity among the rates in different countries. At the same time, foreign exchange markets were generally calm, and forward exchange quotations were less influenced by speculative considerations than in other recent years. Incentives for covered interest arbitrage have weakened through the disappearance, for example, of profitable differentials on comparable quotations in the London money market (Charts 14 and 15). The volume of interest-sensitive short-term capital movements appears to have declined since early in 1963. On the other hand, the stability of long-term yields means that the wide international spread in these quotations persisted in 1963 and early 1964. A more detailed discussion of recent developments in the money and security markets will be found in a Supplementary Note, page 113.
Chart 15.United Kingdom: Rates on Three-Month Deposits and Premium on Three-Month Forward Dollars, 1962–April 1964
Whereas balance of payments considerations in some cases considerably influenced countries’ monetary and debt management policies, fiscal policies were largely directed toward domestic objectives. In general, the stimulation of domestic activity was the important aim in North America and the United Kingdom, while in continental Europe the emerging inflationary pressures called for stabilizing, rather than stimulating, fiscal policies.
In the United States, there was a relatively large budget deficit during 1963 ($4.0 billion on a cash basis). However, the expansion of activity resulted in tax receipts higher than would otherwise have prevailed, and hence the deficit was lower than in 1962. This decline occurred despite reductions in tax liabilities resulting from the increase in approved depreciation allowances and the investment tax credit. The reduction in personal and corporate income taxes, which was not passed until early in 1964, may have been discounted by U.S. businessmen (and, to a lesser extent, even by U.S. consumers) in 1963, and thus provided further stimulus. While this tax reduction is aimed primarily at stimulating economic growth, it is also hoped that the acceleration of the rise in output and the greater profitability of investment encouraged by it will increase the relative attractiveness of domestic, compared with foreign, investment. Efforts to limit increases in expenditure are designed to avoid excessive expansionary effects and—with a rise in revenues resulting from the expansion of the economy—the cash deficit during the forthcoming financial year is expected to be lower than that in 1963-64. At the same time, the reduction improves the “mix” of U.S. fiscal-monetary policies by giving the monetary authorities greater freedom to apply restraint for balance of payments reasons—should this prove necessary—without serious risk of interrupting the expansion of output and employment.
In Canada, the Government’s budget deficit in 1963-64 was about the same as in 1962-63. The 1964-65 budget provides only minor changes in tax rates and expenditure programs, but it is expected that the continued expansion of the economy will lead to rising government revenues and a reduced budgetary deficit. In the UnitedKingdom, the 1963 budget changes were introduced to stimulate expansion. One aspect of the change in direction of economic policy early in 1964 was an intention to help to moderate the increase in demand to a more sustainable rate; increases in tax rates in the April budget were designed to raise revenues by approximately £100 million. Even so, it is expected that there will be a large increase in the Government’s borrowing requirements in the fiscal year 1964-65.
Fiscal policy in Japan was slightly expansionary in the year ended March 1964; however, as revenues were rising substantially with the recovery in economic activity, the deficit on account of government transactions—other than net purchases of foreign reserves—increased only moderately, from ¥ 35 billion to approximately ¥ 53 billion. At the same time, the impact of fiscal policies was overshadowed by a change in the balance of payments. In 1962-63, the financing of foreign exchange acquisitions raised the overall budget deficit to ¥ 161 billion, but in 1963-64 the effect of these transactions was small.
Retrenchment, rather than stimulus, typified fiscal policy in continental Western Europe. One aspect of the stabilization program in France, announced in September 1963, was a reduction in the 1963-64 budget deficit from the original estimate of F 7.0 billion to F 6.2 billion. It is planned that the deficit for the fiscal year 1964-65 will be cut further, to F 4.7 billion. Treasury loans to enterprises have also been reduced.
The budget of Italy for the fiscal year 1963-64 provided for unchanged expenditures and a deficit smaller than the actual results for the fiscal year 1962-63. Initial estimates of budget expenditures and the over-all deficit in 1963-64 were higher than in the previous fiscal year; the initial estimates for 1964-65 show a further rise in budget expenditures but a reduced over-all deficit. In September 1963, it was announced that excess revenues in the budget would, contrary to earlier practice, be applied toward reducing the over-all deficit; certain newly authorized expenditures would be met out of new taxes or cuts in previously authorized outlays; sales taxes would be increased on some luxury goods; and subsidies on residential construction, other than low-income housing, would be withdrawn. In November 1963, depreciation rates for industrial plants were increased so as to encourage investment. In December, the new Government pledged itself to block temporarily, at current levels, public expenditures of both the Central Government and the local authorities, to phase out the investment programs of the public sector, and to match with new taxes any net increase in expenditures that might nevertheless become inevitable. The Government imposed a special sales tax in February 1964 on cars and motorboats and raised the processing tax on gasoline. The proceeds of these taxes were to be used in part to finance government-controlled enterprises, thus enabling them to limit their recourse to the capital market. The remainder of the proceeds were to be utilized to encourage small and medium-sized private enterprises in Southern Italy and other sectors of particular interest. Finally, a number of tax changes were adopted to improve the machinery and the effectiveness of the country’s capital markets.
In the Netherlands, investments by the Central Government and local authorities valued at some f. 200 million, originally planned for the last quarter of 1963 and the first quarter of 1964, were postponed until after October 1964. Tax allowances, suspended in August 1963 and in January 1964 for construction works, were partially suspended after January 31, 1964 for other investments in fixed assets. An increase in taxes on cigarettes and gasoline was introduced on April 1, 1964; the proceeds on an annual basis are estimated at about f. 200 million. In Belgium, the decrease in the budget deficit in the early months of 1964 is attributable to higher ordinary receipts and to efforts made by the Government to slow down extraordinary expenditures and to avoid new ordinary expenditures.
A number of countries took more direct steps to influence demand. Restrictions were placed on the extension of credit for the purchase of consumer durable goods in Belgium, France, the Netherlands, and Italy, and for construction in Switzerland. France also reduced the scope of government subsidies to housing. Pressures in the labor market were eased in France by the release of 76,000 servicemen before their period of service was complete, and in Italy by a reduction of three months in the period of service. Furthermore, Belgium, France, and the Federal Republic of Germany encouraged the immigration of foreign labor. On the other hand, Switzerland concluded that the immediate demands arising from immigration put more strain on the economy than was offset by the resulting expansion of output; hence, for this and wider social considerations, the authorities restricted immigration. To relieve pressures on the price level, France reduced a number of customs tariffs, and the Netherlands forbade a number of price-fixing agreements. Finally, direct restrictions on certain price increases were imposed by Belgium, France, and the Netherlands; rent controls were imposed on nonluxury housing in Italy; and in France, the increase in controlled rents, which was scheduled to take place in January, was abrogated.
Some attempts made in recent years to formulate more general policies to influence the level of wages and salaries, generally known as incomes policies, are reviewed in a Supplementary Note, page 117.