Leading article: The faltering economy: cause for concern, but not for panic
Thursday 18 June 1998
Yesterday's jobless figures - only the second increase in five years - should at the very least cause the most bullish observers to reconsider their optimism. Coming on top of Tuesday's six-year high inflation figure and weekend reports of a serious downturn in the property market, they mean that the "r word" is now back on economists' lips. The question that must now be asked is whether we are about to enter a recession. Is Rosy Scenario about to lose her bloom?
Tuesday's inflation figures came as little surprise. The Budget's tax increases alone meant that there would be an increase, and higher mortgages compounded this. None the less, the May headline rate of 4.2 per cent - up from 4 per cent in April - was well ahead of most City forecasts. The underlying rate, which is targeted at 2.5 per cent, rose from 3 per cent to 3.2 per cent, the highest since November 1996.
All sorts of explanations have been offered, from the 10.9 per cent increase in housing costs to the 9.1 per cent tobacco price inflation. We have even managed to get in our national fixation with the weather, rain damage spoiling the crop and forcing an 8.3 per cent increase in the price of fruit and vegetables - the largest since 1963.
The rise in interest rates a fortnight ago to 7.5 per cent was bad enough, but these latest figures catch the Bank of England between a rock and a hard place. Obliged to keep inflation down - which would indicate a further interest rate rise - the prospect of a strengthening pound on the back of still higher interest rates is enough to send shivers down the spines of exporters who are worried enough, with justification, about the effects of the existing exchange rate. No sooner had the inflation figures been announced than the sterling index rose from 105.7 to 106.1.
On top of all this, when the Bank's Monetary Policy Committee raised base rates last month they did so in ignorance of the Chancellor's public spending plans. The looser fiscal policy which they imply and Eddie George's warning that "we are closer to overheating" than we have been "in a long time" surely make another interest rate rise certain.
But worries about the inflation rate as such should be kept in perspective. Retail prices have remained more or less stable since Black Wednesday in 1992, even during the real boom years. House-price rises, a rising stock market and money supply growth are all, however, now having their effect. So it is not Gordon Brown who should be held responsible, but Kenneth Clarke - not least for the lax interest-rate policy at the end of his chancellorship.
Less striking but more worrying are yesterday's labour market figures. The first rise in the number of jobless for two years (the last blip in an otherwise steady five-year fall) is almost certainly due to the combination of the strong pound and interest rate rises. With no likelihood of either of these being reversed, the chances are that unemployment will continue to rise - albeit in tiny steps. But the 5.2 per cent increase in average earnings - the highest rise since recovery began - needs to be watched. Inflation may not yet be a worry, but if we move towards the traditional British wage-price spiral we will certainly be in trouble. A CBI survey published yesterday found that some big companies are cutting back on property investment in the expectation that economic growth will slow - often an accurate harbinger of future developments.
There is as yet no reason to think that we are about to enter a recession. However, while none of the individual measurements are in themselves cause for alarm, taken together they have the makings of something worrying.
The Chancellor has so far demonstrated a nifty touch. But we will only see his true mettle in the next few months.
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