Comment: A forecast the Chancellor will not easily abandon

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The Independent Online
If politicians were really able to run the economy in the way they liked there wouldn't be any doubt about what lies in store for 1996. This is a pre-election year - indeed given the accelerating rate of attrition in the Tory ranks, John Major may be forced to go to the polls this year.

Kenneth Clarke, a political Chancellor to his bones, is not going to be squeamish about playing the only real card left to the Tories - a restoration of the "feelgood" factor. So you can rely upon him to pull all the levers he can to prove that his ambitious 3 per cent growth forecast was not simply a figment of an overheated imagination.

We've had one set of tax cuts; another's on the way. We've had two quarter point cuts in interest rates; another one is on its way, with the City betting on the meeting between Ken and Eddie on 7 March as the likely date.

As if this were not all enough, consumer spending has held up remarkably well in the face of all the recent gloom. According to the latest official statistics, consumers forked out 2.4 per cent more in 1995 than they did in 1994 - not bad given the fact that real incomes after tax were falling for much of the year. With real after-tax incomes now likely to grow sharply, and big windfall gains courtesy of building society flotations, the economy looks set for a traditional consumer spending spree.

But there's a fly in the ointment. The consumer may be resilient but manufacturing, which is much more reliant on foreign sales, is suffering badly. Output fell in the final quarter of last year. Official figures out yesterday suggested that the plight of manufacturing will persist for several months to come. What they revealed was that manufacturers continued to pile up stocks in the last three months of 1995. With European economies sliding into recession, industry can't hope to export its way out of this problem of surplus inventories. Instead, it looks set to supply extra demand over the months ahead from these stocks rather than by producing more.

Manufacturing only comprises one-fifth of the economy nowadays, but a sharp downturn in production could prove contagious if people are laid off. None the less, most economists are betting on the consumer winning the day. But this may not be until well into the second half of the year, so comprehensively demolishing Mr Clarke's ambitious 3 per cent growth forecast. More than ever, the Conservatives will be moving heaven and earth to the wire, delaying the election till the last possible moment in May next year.

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