Economy shows the first signs of cooling down

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A batch of new figures yesterday brought the first hints that the overheated economy might be cooling down. Diane Coyle, Economics Editor, asks whether this means the Bank of England has really broken the cycle of boom and bust.

Early signs that the economy has come off the boil encouraged hopes that the five rises in interest rates since 1 May have engineered a "soft landing".

However, there were enough mixed signals in yesterday's figures to keep the experts divided about how much further rates might yet have to climb. Some economists reckon the Bank of England will have to do more to ensure the necessary slowdown.

The Office for National Statistics reported a lower figure for gross domestic product growth last quarter than the initial estimate, down to 0.9 per cent from 1 per cent. Separate figures from the Bank of England showed that broad money growth slowed last month.

In addition the latest survey showed a drop in consumer confidence from its midsummer high. And the Confederation of British Industry said business optimism had weakened sharply.

Robert Barrie, an economist at BZW, said: "The Bank has been running a tough policy, and I sense that the economy is on the turn."

But other City analysts found evidence to the contrary beneath the headline figures. Michael Dicks of investment bank Lehman Brothers said: "This Christmas could turn out to break the record books. People would have to stop spending abruptly in the New Year for the Bank of England to avoid raising interest rates."

Ciarn Barr of Deutsche Morgan Grenfell agreed. "There is no indication that the economy is about to start slowing," he said.

The revised estimate showed the growth rate edging down from 1 per cent in the second quarter of this year to 0.9 per cent in the third. Consumer spending growth hit 3.8 per cent year-on-year - the fastest since 1988 - but its quarterly rise tailed off slightly to 1.2 per cent due to the impact of the royal funeral on retail sales.

Investment dived by 1.2 per cent in the quarter, following a boost due to aircraft purchases in the previous quarter. It remained 3.8 per cent higher than a year earlier.

The figures for GDP in the fourth quarter, due in January, are likely to be crucial to the Bank of England's decisions. An interest rate increase before early February would now come as a surprise to the financial markets.

The CBI's survey supported the evidence of weaker growth. Export orders are still falling, according to its members, although the sharp deterioration has been halted.

Manufacturers' expectations for future output dived to their lowest for two years. The balance of companies expecting to increase rather than reduce production in the next four months fell to 9 per cent from 20 per cent.

Sudhir Junankar, a CBI economist, said: "The weakness on the export front now appears to be leading manufacturers to scale down their hopes of output growth." He predicted one more increase in interest rates to a peak of 7.5 per cent.

A separate survey of consumers by pollsters GfK showed a big drop in confidence from its post-election record highs, although it remains well above the long-run average. The optimism balance reached a peak of 10 per cent in August, had declined to 7 per cent by September and reached 2 per cent this month.

Even M4, whose rapid growth has been one of the Bank of England's bugbears, decelerated. The big repayment of public debt by the government and "repo" transactions by the banks took its growth rate from 11.8 per cent in September to 10.9 per cent.

Separate figures from the high street banks and building societies showed a modest pick-up in new mortgage lending during the month, and a bounce back in credit card lending after a depressed September.

Net lending by the building societies rose from pounds 928m to pounds 953m, and by the banks from pounds 606m to pounds 817m in October. Other bank lending was weaker.

Outlook, page 25