I know there is deep concern on both sides of the House about the steps the Government had to take last Thursday. My speech this afternoon has two purposes—first, to describe developments in the economy since we last debated it over two months ago and to explain why the Government have decided to tighten credit and to apply to the International Monetary Fund for the use of further facilities; and second, to discuss the implications of these decisions and to answer in particular the questions on which I expect this debate will focus. Do the Government's recent decisions represent—or require—a fundamental change in the direction of their economic strategy? If not, is the strategy aiming in the right direction? And is there any alternative strategy which would better meet our economic needs?
First, I will give a short account of the background to the Government's decisions.
In the world economy at large, there has been a slackening in the pace of growth of output and of trade. In July, worry that the world recovery might be proceeding too fast was still widespread. Now it has largely given way to fears about the continued strength of the upturn. In all the leading industrial countries the growth rates in the second quarter of 1976 were below those in the first quarter. By the same token, the reductions in unemployment seen in many countries earlier in the year seem to have been checked or reversed, for the time being at least.
Yet Governments world-wide are still worried about the threat of inflation. The decline in consumer prices seems to be decelerating in most countries. In recent weeks interest rates have been raised in France, Italy, Sweden and Denmark. Moreover, France and Italy, among a number of other countries, have introduced comprehensive counter-inflation programmes in which the search for an incomes policy such as we have operated so successfully plays a central rôle.
Britain is no longer at the bottom of the inflation league. However, we are still at the wrong end of the second of the three divisions. In the United States and Germany, inflation rates are running around 4 per cent. or 5 per cent. a year. In Japan, France, Canada and the Benelux countries inflation is in the range of 8 per cent. to 15 per cent. This is the second division we have now entered. We still have a long way to go before we can enter the first division. But we have at least climbed well out of the third division in which Ireland and Italy now find themselves, with inflation well over 20 per cent.
Until very recently we were moving steadily towards our original target of single figure inflation by the end of this year. That this target is now out of reach is not due to our labour costs rising more sharply than provided for in our pay policy. On the contrary. It is the consequence of the sharp rise in commodity prices earlier this year, which has affected inflation in many other countries, particularly France, in recent months, and of the rapid depreciation of sterling. Though our relative inflation rate made some depreciation inevitable over time, sterling has fallen faster and further than we expected.
There may have been a rather less vigorous rate of growth at the end of last year and the beginning of this than seemed likely on the basis of earlier assessments. Moreover, in the second quarter of this year we clearly shared in the world-wide hesitation in growth. It may be that this was only a temporary dip in the rate of growth, similar to that which took place in Britain at the same point in the last cycle in the summer of 1972. The estimates for industrial production up to July suggest that the underlying trend of industrial output is still rising, although somewhat less than previously thought. The growth that there is is concentrated in the manufacturing sector. Latest three months on latest three months, manufacturing production was up by 1·4 per cent., or nearly 6 per cent. a year at an annual rate.
The increase in manufacturing production has already led to an increase in employment in manufacturing industries starting in June. This reversed the previous decline in manufacturing employment since the end of 1973. It is one of the indications that the priority we are giving to manufacturing industry is already having an effect. The large number of unemployed school leavers brought unemployment up to just over 1¼ million in August—an appalling figure—but total unemployment fell in September as school leavers moved into jobs. There are signs that seasonally adjusted unemployment for the United Kingdom, excluding school leavers, is now rising, if at all, only very slowly.
However, the prospect remains uncertain. Even though we are now getting a rise in employment where we most want and need it, there is not the scope there was in previous cycles for expansion in public and private service jobs. Like other countries we are still emerging from the deepest international recession since the war, and, as has become more and more widely recognised, there is an international dimension to curing unemployment. There is also a puzzling change in the composition of the unemployment registers. Men used to outnumber women five to one on the registers, but this ratio has now changed to only three to one. It may be that a higher proportion of women without jobs are registering than in the past.
There is now firm evidence that the measures we have introduced over the last 18 months or so to help in reducing unemployment are having the effect we intended. As the House knows, we introduced a further set of such measures a few weeks ago.
We now have the Temporary Employment Subsidy, the Job Creation Programme, the new Work Experience Programme and the Job Release Scheme; and the counter-cyclical training schemes which the Manpower Services Commission has introduced on top of its large existing programme. These measures are directed at those particular sectors of the labour market which have the greatest priority in a recession: the young, especially school leavers; those facing redundancy, or prolonged unemployment; and those in the areas where unemployment is highest.
It is important as we emerge from the recession that industry should be ready to cope with the new problems of the upswing: that trained work forces should be kept in being, that the level of skill training at apprentice level and the level of adult retraining should be maintained, and that those young people who have come on to the labour market for the first time should not have their morale weakened and their attitude to training and work soured for the rest of their working lives by the reduction in job opportunities that a recession brings.
These measures are already having a significant impact. Between the summer of last year and Easter of this year, 150,000 school leavers found work even though the general unemployment level was then rising fast. I would expect at least a comparable fall in unemployment amongst school leavers this year. And the level of training in industry has been maintained at the same level as in boom years. We estimate that the measures we have so far introduced will help about half a million people through this period of abnormally high unemployment.
Such measures have been widely adopted in other countries, but they can only be regarded as palliatives, alleviating the impact of unemployment.
The rate at which we return to full employment depends above all else on our ability to improve our industrial and sales performance so as to take full advantage of the export opportunities open to us as a result of the world recovery and the greatly improved ability of British goods to compete on price, both at home and abroad.
The record here so far is an encouraging one. The overall increase in export volumes in the 12 months to August has been well over 10 per cent., while exports of chemicals, metals, principal metal manufactures and other manufactures have all risen more than 20 per cent. Since this took place in a period when national output rose far less than this, it represents a substantial shift of GDP into exports, and that is one of the basic objectives of the Government's economic strategy.
Moreover, we have at last begun to increase our penetration of the more difficult markets in the industrial countries: right hon. and hon. Members will have seen this morning that our exports to Germany rose 24 per cent. in deutschemark terms between the first half of 1975 and the first half of this year.
We have always insisted that export demand must be the main foundation of our recovery, and so it is proving. For example, new engineering orders rose at an annual rate of more than 20 per cent. between the first and second quarters of this year—home orders at 10 per cent. and export orders considerably more. Similarly, the 20 per cent. increase in the volume of chemical exports to which I referred has contributed to a 12 per cent. increase in output over the period.