Confidence grows with the economy: GDP rise set to beat Treasury forecast. Consumers are more optimistic

OFFICIAL figures suggest the economy is on course to top 3 per cent growth this year, easily beating the Treasury's forecast of a 2.75 per cent expansion.

The figures coincided with a Gallup survey showing that confidence in the economy is improving and consumers are more optimistic about their own financial position than at any time since September 1993.

The survey also showed that respondents were more optimistic about the general economic situation. Confidence was at its highest since January.

The Central Statistical Office revised upwards its estimate for growth in the second quarter to 1 per cent, a gain of 0.1 points on provisional figures. But it also lifted original estimates for growth in the previous two quarters, indicating the momentum behind the recovery is stronger than previously thought. The expansion last year was put at 2 per cent, up from the provisional 1.9 per cent.

National output in the second quarter stood 3.7 per cent above output levels a year earlier, the fastest quarterly growth rate on this basis for more than five years and significantly above the initial estimate of 3.3 per cent. Excluding oil and gas production, national output was 3 per cent higher than a year earlier.

Sterling extended last week's decline, shedding 0.85 pfennigs to a closing DM2.3754, a 17-month low. Shares fell back and the FT-SE 100 ended 20.1 points down at 3,171.3.

The pound's weakness reflected market worries that there was no sign of an early rise in base rates to head off future inflation pressures, in spite of accelerating growth. Yesterday's figures gave no sign of quickening inflation, however.

Inflation, as measured by the GDP deflator, an index of home- generated costs, rose 2.2 per cent in the year to the second quarter - the lowest for 25 years.

Even if there were no growth at all in the third and fourth quarters, City economists said output in 1994 would, on average, stand 2.9 per cent higher than in the previous year. Kevin Gardiner, UK economist at Morgan Stanley, said: 'The recovery is a lot more durable than people have realised. Across the City, growth forecasts will be raised.' On the basis of economic evidence to date, Mr Gardiner and other City economists predict growth of about 3.5 per cent in 1994 and a further strong expansion next year. The Treasury said it stood by its midsummer forecast but acknowledged there were 'margins of error'.

Growth was helped by a strong performance in oil and gas output, up 6.8 per cent in the period and 37.3 per cent on a year ago.

View from City Road, page 25

(Graph omitted)