Door remains ajar for rates cut

Economics: Sluggish growth in UK and a slowdown in the former powerhouse of Europe arouse pessimism
The door was left slightly ajar yesterday for a further interest rate cut as sluggish data showed the economy continuing to grow below trend. Britain's Gross Domestic Product grew by 0.4 per cent in the first quarter of 1996 from the previous quarter, leaving the annual increase unchanged at 2 per cent, and well short of the Government's forecast of 3 per cent for the year as a whole.

"The weakness we are seeing in the first quarter does serve to undermine the consensus that the economy is picking up speed," said Simon Briscoe at Nikko Europe.

Kenneth Clarke, the Chancellor of the Exchequer and Eddie George, Governor of the Bank of England, next meet to discuss monetary policy on 8 May, not long after this Thursday's local council elections in which the Conservatives are widely expected to suffer a drubbing. "If the results are poor, Clarke will probably want to go for an early cut. He is unlikely to be put off by the prospect of an adverse market reaction or even the prospect of Eddie George disagreeing with him," said Andrew Cates of UBS.

The weak British data coincided with yet more grim economic news from Germany, the Continent's erstwhile powerhouse. The Bonn government's independent economic advisers yesterday predicted German GDP will grow by just 0.5 per cent this year, slashing their forecast of 2.5 per cent made only six months ago.

The persistent difficulties on the Continent cast a shadow over hopes for a strong recovery later in the year in UK manufacturing, which is stagnating for the moment. Yesterday's economic data included a February visible trade deficit of pounds 1.5bn, little changed from January. It confirmed the continued weakness in export volumes, concentrated in exports to continental Europe.

"We need EU growth of about 2 per cent just to keep UK manufacturing ticking over. At present it is well below that, and so are our hopes of a manufacturing recovery," said Ian Shepherdson of HSBC Markets. "If I were the Chancellor going into that meeting on 8 May, given the weakness in GDP, producer prices and Europe, we can afford a quarter-point rate cut."

Other economists urged caution on hopes of a rate cut, pointing to strong monetary growth, a brighter outlook for consumer spending and expectations of a pick up in British industrial output once it has worked off the overhang in stocks built up last year. M0 data, also out yesterday, showed the narrowest measure of money supply grew by 5.6 per cent in the year to April, up from 5.4 per cent in March.

Mr Clarke has trimmed official rates by three quarters of a per cent to 6 per cent in three stages since December. Financial markets are pricing in a rise of nearly half a per cent by the end of this year. In the Governor's March meeting with the Bank of England, Mr Clarke spoke for the first time of raising rates by the end of the year if necessary.