Bullish growth forecasts cheer City but clear the way for rate increases

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The Independent Online

The economy has enjoyed its longest period of uninterrupted growth since the Industrial Revolution two centuries ago, Gordon Brown claimed as he forecast a return to boom conditions in the run-up to a likely general election.

The Chancellor taunted the Opposition benches, confirming that the economy grew by 2.3 per cent last year, meeting the target of between 2 and 2.5 per cent which Mr Brown set 12 months ago amid much scepticism.

Mr Brown said: "When I made that forecast a year ago the Opposition said that it was not just incautious and wrong but - and I quote - 'a deliberate misrepresentation' of Britain's economic prospects and not to meet it 'destroyed credibility'."

He stuck to his bullish forecasts of strong growth of between 3 and 3.5 per cent - above the UK's long-term trend of 2.75 per cent - in both 2004 and 2005. This would be the first back-to-back years of plus-3 per cent growth since 1998.

The pound rose after the Budget speech as the markets concluded that the booming economy would force the Bank of England to raise interest rates quickly to stem inflation.

Economists said that Mr Brown's decision to produce a "fiscally neutral" budget - neither curbing nor boosting economic growth - had left the job of controlling inflation with the Bank.

"If he wanted to help monetary policy, he would have raised taxes on households, which would have taken some of the pressure off the Bank of England," said Neville Hill, a UK economist at Credit Suisse First Boston. The Chancellor also confirmed his forecast for 2006, indicating a slowdown to between 2.5 and 3 per cent - although this forecast is still above the long-run trend rate of 2.5 per cent.

"I can now report that Britain is enjoying its longest period of sustained economic growth for more than 200 years ... the longest period of sustained growth since the beginning of the Industrial Revolution," he declared. Mr Brown's growth projections make him one of the country's most optimistic forecasters - in the City, economists are expecting growth of just 2.7 per cent in each of the next two years. Given that the Treasury assumes growth at the lower end of the range when putting together the public finances, this equates to a total shortfall of £6bn over those two years - if the City is right.

The breakdown of the forecasts shows that the Treasury has been forced to admit the rebalancing in the economy, between consumer spending on the one side and manufacturing and exports on the other, has been delayed.

Household consumption growth will stay above 3 per cent - well above the rest of the economy this year, rather than slowing to around 2.5 per cent as the Treasury forecast in December's pre-Budget report.

This means the UK will suck in even more imports - now set to rise 6 per cent this year rather than 5.75 per cent - leading to a current account deficit of £32.75bn or 2.75 per cent of GDP. In December, the Treasury forecast there would be a £29.5bn or 2.5 per cent deficit.

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