Boost in economy takes businesses by surprise

BUSINESSES plundered their stockpiles over the summer, indicating that the sharp upturn in the economy took them by surprise, it emerged yesterday.

The value of stocks of unsold goods fell by pounds 1.8bn in the second quarter of the year, the largest drop since the end of 1991, according to revised GDP figures published yesterday. Analysts seized on the sharp rundown, saying it pointed to higher growth in the rest of the year.

Marian Bell of Royal Bank of Scotland said businesses had underestimated demand. "In which case stockbuilding should push up growth in the second half of the year," she said. Adam Cole of HSBC added: "Clearly lower stock levels add to the case for a further rebound in activity."

The positive outlook for accelerating growth came as it emerged that the Chancellor, Gordon Brown, may consider raising the Treasury's estimate of trend growth for the economy.

According to reports yesterday, the Treasury may lift its estimate for the rate at which the economy can grow without triggering inflation from 2.25 per cent to 2.5 per cent or even 2.75 per cent. This would give the Government room to increase spending without breaking its pledge to prudence in fiscal policy.

A Treasury spokesman dismissed the report as "speculative". He welcomed the GDP figures, which he said fitted with government estimates of 1 to 1.5 per cent for 1999 growth. "The figures show growth in most sectors is picking up. This is entirely consistent with Budget forecasts," he said.

Overall, the economy grew 0.5 per cent in the second quarter - up 1.2 per cent on a year ago. The GDP figures confirm the economy is growing at its fastest rate for nearly a year.

Manufacturing grew for the first time in a year while service sector growth fell to its lowest level since 1992, raising hopes of an end to the UK's two-speed economy.

The manufacturing sector emerged from nine months of recession to grow 0.4 per cent in the second quarter, the highest since the second quarter of 1998. The rise drove industrial production up by 0.6 per cent. The first quarter saw falls of 0.3 per cent and 0.6 per cent respectively. Services grew 0.4 per cent compared with the previous quarter, a revision down from the first estimate of 0.5 per cent. This left annual growth of 2.3 per cent - the lowest since the end of 1992.

Hopes of a correction to the economic imbalance were boosted by the first contribution of net exports to GDP for two years. The UK's deficit in goods and services was pounds 8.54bn compared with pounds 9.02bn in the first quarter - the first fall since the second quarter of 1997 and adding 0.2 per cent to GDP.

The recovery in manufacturing, with growing consumer confidence, low unemployment and surging house prices, will fuel the debate over interest rates.

Ciaran Barr of Deutsche Bank said: "The question now is when the Bank will have to raise rates. We are looking for a November rise and are one of the only ones saying that, but this data only supports that."

Outlook, page 13