City braced for pounds 3bn overshoot on government borrowing

Figures for government borrowing last month which will be published today are set to end the Government's run of good luck on news about the economy. Most City economists expect them to show it overran its pounds 29bn borrowing target for 1995/96 by about pounds 3bn, casting doubt on the scope for tax cuts.

Retail price figures also due today are likely to show another fall in the inflation rate. However, City analysts concluded yesterday from last month's surprisingly big fall in unemployment that a further reduction in the cost of borrowing is now unlikely.

The FT-SE 100 index ended nearly 20 points lower at 3,805.6, with gilts also weaker.

Apart from the additional evidence from the fall in the unemployment count that the economy is building up steam, growth in underlying average earnings picked up to 3.5 per cent in February after staying flat at 3.25 per cent for the previous seven months.

In another sign of buoyancy, there was a rise of 3,000 in employment in manufacturing in February, after a big drop of 27,000 the previous month. Vacancies advertised at JobCentres - about a third of the total - also increased by 6,800 in March, taking them to the highest level since April 1990.

Michael Saunders at investment bank Salomon Brothers said base rates seemed likely to stay around 6 per cent for some time. James Barty, an economist at Deutsche Morgan Grenfell, went further: "With growing evidence of stronger consumer demand and a recovering housing market, the question is when and by how much rates will have to rise," he said.

Some also read the prospect of base rate increases into comments by Eddie George at last month's monetary meeting with Kenneth Clarke, at which they agreed to cut a quarter point off interest rates. The Governor said while there was little short-term inflationary pressure there was a possibility rates would have to rise "when there was clearer evidence that the growth of demand and output had begun to accelerate".

"The Governor appears to be staking out a position to oppose any further easing by the Chancellor," Mr Barty said.

Yesterday's mass of statistics revealed the labour market to be more buoyant than expected after February's small rise in joblessness. Although the big drop in the claimant count was exaggerated by the unwinding of strike action in JobCentres, official statisticians said the underlying trend was a decline of around10,000 a month.

The number of people on unemployment benefit has fallen by 794,500 from the peak of just under 3 million in December 1992. Analysts think the transfer of people from invalidity to unemployment benefit could slow the pace of decline in the claimant count.

Separate figures from the Labour Force Survey for December to February, which collects unemployment statistics on a more widely accepted definition, showed a fall of 94,000 in unemployment during those three months. This brought the LFS measure, which the Office for National Statistics has recommended should be collected monthly, closer to the headline measure although still higher.

Employment rose by 118,000, mainly due to growth in part-time jobs for women. Women won 83,000 of the quarter's new jobs, and 88,000 of the total were part-time.

Most City economists were not too concerned about the rise in underlying earnings growth. It was due to higher earnings in the service sector.

"The rise was inevitable at some point this year and is no threat to the Government's inflation target," said Adam Cole at James Capel.

Comment, page 21

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