Consumers keep up the spending spree
Saturday 23 May 1998
New figures for gross domestic product showed slightly higher growth than first estimated, but confirmed that the weakness of industry and exports is slowing the economy.
The signs of slowdown left a majority of City experts confident that the Bank of England will not have to raise the cost of borrowing again, despite the split between buoyant consumer spending and services on the one hand and sagging exports and manufacturing industry on the other. Rising pay claims are seen as the last possible source of danger on the interest rate front.
The upward revision yesterday to GDP growth, from 0.4 per cent to 0.5 per cent in the first quarter, and from 2.8 per cent to 2.9 per cent year- on-year, was exactly as expected.
Details showed consumer spending still growing at an annual pace of 5.1 per cent, the highest since the end of 1988. Investment spending was strong too, up 5.5 per cent compared with a year earlier.
However, government spending fell slightly in real terms, while the widening gap between exports and imports lopped 1.8 percentage points off the overall growth rate. This was the result of the widest trade deficit, in constant pounds, since the middle of 1993.
"It is not clear whether the economy's landing will be soft or hard, in view of the two conflicting forces," said Kevin Darlington, an economist at ABN-Amro.
The industry breakdown showed that while manufacturing has officially moved into recession, services have started to slow too. The quarterly increase in their growth was, at 0.7 per cent, the lowest for a year and a half and revised down from the earlier figure of 0.8 per cent.
The City's doves were swift to pounce on this bit of the evidence. "It suggests a broad-based slowdown in activity," said Nick Vaughan of Barclays Capital.
The Bank of England's Monetary Policy Committee gets its next chance to vote on interest rates in two weeks' time, and none of the figures due before then is expected to sway the vote in favour of an increase. The latest published minutes showed a 5-3 majority against an increase in April, and there was also no change earlier this month.
The arrival in June of John Vickers, the Bank's new chief economist and the final member to join the MPC, alters the arithmetic slightly. Professor Vickers, an Oxford academic, is an unknown quantity but suspected to be a dove because of his expertise on industry.
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