'Fragile' British Recovery Dangles On Well-Being of EC Neighbors

AFTER the longest and deepest recession since World War II, Britain's economy is on an upswing.

But though it is beginning to look healthier than those of its main European Community (EC) trading partners, the mood of the British government and industry alike is one of cautious optimism. They know that decisions taken in other European countries will have an important bearing on what happens in Britain.

Chris Haskins, chairman of Northern Foods and a leading industrialist, calls the British recovery "fragile." It is an adjective widely applied by industrialists and economists. Mr. Haskins notes that downturns in Germany, France, and other EC countries are not good for Britain.

"Britain trades to prosper, and when your best customers stop buying, we suffer," he said.

The problem of local recovery being threatened by economic difficulties across the English Channel is illustrated by Britain's auto industry. After two or three years in the doldrums, car sales to customers in Britain have been rising steadily this year - but exports of British-built cars to other EC countries have begun to fall.

Last week Peugeot, the French auto manufacturer, was forced to curtail production in Britain of its 405 model because of slackening demand in continental Europe. As a result, some 300 British car workers stand to lose their jobs.

Peugeot's plight reflects widespread concern in Europe's car industry. It has seen sales plummet by 17 percent EC-wide since the beginning of the year. Jacques Nasser, chairman of Ford of Europe, has warned of coming job losses in his company.

"The overall picture looks very difficult, and we have some tough decisions ahead of us," Mr. Nasser said in a letter to employees last week. Ford's workforce in Europe has fallen from 115,000 in 1990 to 80,000 now.

Nasser said car markets in Germany, France, Spain, and Italy were in the grip of deepening recession. Only in Britain, with sales up by 8 percent this year, was the picture brighter. But Ford plants in Britain have been operating at less than capacity because of falling demand for their cars in continental markets.

Roger Bootle, chief economist with Midland Bank, says Britain's relatively good position is explained by the government's success in reducing inflation, now at 1.4 percent. He predicts that Britain's recovery will continue.

BRITISH exporters were given a boost by devaluation of the pound last September, when Britain quit the EC's exchange rate mechanism. This made British products cheaper in EC countries.

Kenneth Clarke, who took over from Norman Lamont as chancellor of the exchequer early in the summer, inherited an economy already on the upswing. Gross domestic product has risen in the last four quarters and unit labor costs - a crucially important industrial factor - are working in Britain's favor.

According to the bankers S. G. Warburg, British labor costs have fallen sharply. In the past year unit labor costs fell by 5 percent. Germany's rose by 8 percent.

In a sign of rising confidence among investors, last week for the first time the London stock exchange index broke the 3,000 barrier.

Mr. Clarke will return from vacation next week to face a series of decisions which will help determine whether or not confidence is retained. He has to find ways of cutting back government borrowing, running at 1 billion British pounds ($1.5 billion) a week, without damaging economic recovery.

The Confederation of British Industry has warned that if Clarke tries to tackle the problem by increasing taxes, he will hit industry hard. The CBI would prefer that spending on health care and social security be curbed instead.

Many government supporters agree with the CBI assessment. But the opposition Labour Party would be certain to launch a bitter and probably damaging attack on the government if Clarke, in his autumn budget, decided to reduce the debt by hacking away at the welfare state.

Another key decision Clarke must make is on interest rates, which currently stand at 6 percent. Gavin Davies, chief economist with Goldman Sachs, thinks a cut of 1 percent is likely within the next month or two.

This, he says, would help to give the recovery a shove, if it should flag.