LONDON -- When rumors swept the London Stock Exchange Thursday that a new public opinion poll would show that the electoral gap between the Labor and Conservative parties had narrowed to 2 percent, the Financial Times index dropped about 30 points within an hour.
The rumor was false, and the incumbent Conservatives remain about 9 percentage points ahead. But Labor has shown surprising strength and, as Thursday's election draws near, the financial community's well-publicized jitters did as much for the Tory cause as any advertisement.
The Conservative campaign has focused on convincing Britons that a return to Labor government would mean a resurgence of the so-called "British disease" -- ponderous, failing industry, high inflation, strikes, IMF borrowing and long-term decline. Instead, Prime Minister Margaret Thatcher has argued, her eight years in office have made Britain's economy well again.
"The British economy today is stronger and sounder than at any time since the war," Chancellor of the Exchequer Nigel Lawson told the Confederation of British Industry last month.
On the surface, it is difficult to argue with that assessment. Growth has been steady for the past six years at about 3 percent annually, and currently is higher than that of any other major European country. Inflation has dropped to its lowest level in two decades, net overseas assets are second only to Japan's at close to $180 billion. Public borrowing, at $5.4 billion for fiscal 1987, is down to 1 percent of income.
The basic income tax rate has dropped under the Tories from 33 to 27 pence to the pound. The top tax rate on earned income has fallen from 83 percent to 60 percent. Although the basic rate of income tax has come down from 33 percent to 27 percent, indirect taxes have risen. In 1979, the government took 35 pence of every pound of national income; today it takes 38 pence. (There are 100 pence in a pound, which is worth around $1.64.)
Indeed, a favorable string of economic indicators over the past several months was a significant factor in Thatcher's decision to call an election a year earlier than she was legally bound to: 10 successive months of falling unemployment, a decrease in interest rates, surpluses on the current account, and manufacturing output rising 4 percent a year.
But more than a few economists argue that Britain's economic recovery is fragile, and that much of Thatcher's success depends less on progress from fundamental reforms than on external or one-time factors such as exchange rates and North Sea oil. Moreover, they add, the recovery is relative.
Manufacturing output is indeed rising. But it still hasn't recovered to its 1979 level, highlighting the severity of the 1980-1981 recession. Britain's trade in manufactured goods has fallen into sharp deficit during the Thatcher years, and only North Sea oil and a growing services sector have kept the overall trade account near balance.
Britain is growing faster than much of the industrialized world but not, many economists fear, fast enough to make a significant dent in unemployment. Few economists believe unemployment will drop much below 3 million, or 10 percent to 11 percent of the work force, in the foreseeable future, despite ambitious government projects.
Meanwhile, The Unemployment Unit, an independent research and lobbying group, estimates that having 3 million people out of work costs the government as much as $34 billion a year in benefits and lost taxes.
Though economists see Britain's growth slowing next year to a rate more in line with its major trading partners, no one is predicting a recession. But as Lawson points out, the relatively sluggish global economy is causing concern.
"The biggest risk to growth in the U.K. is probably the overseas risk," said Ian Harwood, an economist at Warburg Securities. Many economists agree that continued significant British growth depends heavily on thriving export markets. According to Harwood's forecasts, a 1988 growth rate in countries represented by the Organization for Economic and Community Development of 1.5 percent instead of the expected 2.5 percent would slow British growth by 0.25 percent, and increase Britain's current-account deficit by $490 million.
Britain's growth prospects also hinge heavily on the value of the pound, another front where some economists fear trouble. During 1986 the pound fell by 14 percent against a basket of the currencies of Britain's major trading partners, giving British exporters a welcome competitive boost. This year, as the markets reflected their faith in the Thatcher economy, they bid the pound higher and higher, eating away at progress.
According to the Bank of England, sterling's 7 percent rise since February against the currencies of its major trading partners has wiped out possibly half the competitive gains to British industry from last year's depreciation of the pound.
While inflation, hovering around 4 percent, is less than a third of its 1979 level, it still is higher than that of most other industrialized countries. Under Thatcher the number of man-hours lost in work stoppages has dropped to its lowest level in decades.
But Thatcher's success in taking on Britain's powerful trade unions still hasn't managed to rid the United Kingdom of its worst inflationary pressure. Average earnings increases remain far above the inflation rate at about 7.5 percent a year. Many argue that persistently high wages for those at work are preventing any significant falloff in the welfare rolls.
"They haven't got a recovery," Labor Party leader Neil Kinnock fumed in a recent speech. "They've got a steroid fix" bought by a precampaign tax cut and well-timed pay settlements. "They haven't got a boomlet. They've got a bubble. And if they were allowed to go 'on and on' with their policies," Kinnock said, echoing a phrase Thatcher has used to describe her ambitions, "that bubble would burst, with the increasingly terrible consequences for jobs and industries."
Campaign rhetoric aside, Labor is not alone in arguing that Thatcherism hasn't reversed some fundamental economic problems. "Yes, the news has all been good in the recent past," said Harwood. "We have been doing well. But we won't keep doing well. The old trends are going to reassert themselves. It's the balance of payments and the inflation outlooks which are the most worrying."
Along with disappointing world growth, and a consumer spending boom that has fueled demand for imports, the pound's recent high level is helping put Britain's current account back on the road to deficit, after a surplus in the first four months of this year.
"We are in for a number of very rough years with the balance of trade," said Gavan Duffy, senior economist at Cambridge Econometrics, a forecasting firm linked to Cambridge University.
Eight years of Thatcher government have brought fundamental changes in the organization of the national economy that any successor would find hard to reverse. As the Tories have sold off more than 1 million houses and apartments formerly belonging to government bodies, the share of owner-occupied housing has risen from 55 percent to 63 percent.
Meanwhile, few argue that the drop in inflation, as well as a jump of more than 13 percent in productivity, was bought by the elimination of perhaps as many as 2 million jobs. The government claims to have created more jobs than the rest of Europe, but even it acknowledges that many of them have been part-time and for newly working women. Unemployment has hit hardest among people in the traditional manufacturing industries.
For her part, Thatcher stresses high-technology, service industries and small businesses as lining the route to the future. But others, of course including the Labor Party, stress that Britain can never have a thriving economy without a strong manufacturing base. "The answer is, at home and abroad, if we don't make the goods, and market the goods, then we don't pay our way," Kinnock said in launching his campaign.