Experts disagree on what will happen next in the economy

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The Independent Online
ECONOMISTS ISSUE contrasting warnings about prospects for the economy in two reports published today.

The UK's strong economy will be a double-edged sword for the Chancellor, according to one report from the Centre for Economics and Business Research. It warns of an impending Eighties-style boom that will need a large dose of monetary or fiscal tightening.

But another report from a competing consultancy predicts a sharp slowdown next year. Business Strategies says an end to the growth in employment and fears of higher interest rates will contribute to a slowdown in consumer spending from 3.8 per cent this year to 1.8 per cent in 2001, the lowest since 1995.

Economic growth will accelerate in the years running up the election, delivering Gordon Brown a pounds 20bn war-chest for tax cuts or extra spending, the upbeat CEBR says. But this same success threatens to become a runaway boom that will force the Government to do the exact opposite - raise taxes or cut spending - in order to avoid a crash.

The consumer boom will drive the economy close to capacity, pushing unemployment down to 4 per cent in 2002, the last year Tony Blair can call an election. However, CEBR says the Bank of England will be forced to hike rates from their current 5.25 per cent to 7 per cent by 2002, which will make it impossible for the UK to join the euro until 2005 at the earliest.

But if Gordon Brown is tempted to abandon his prudent approach and seek vote-winning tax cuts or cash injections into the public services he could drive economic growth to even more dangerous levels.

Douglas McWilliams, CEBR chief executive, says: "The Chancellor will have a pounds 20bn war-chest ... but for economic reasons he will be unable to spend it and may even have to cut back. He has a choice - scale back public spending, raise taxes or allow the Bank to raise rates."

But while CEBR forecastsconsumer spending growth will stay strong at about 4.5 per cent, Business Strategies says growth in household spending will slow to a six-year low by 2001.

"Conditions are taking a curious twist on the high streets," said Melanie Lansbury, Business Strategies managing economist. "Consumer confidence continues to strengthen and retail sales have improved considerably. Yet people have become particularly price conscious and the chief reason why we are likely to see a change is that jobs in all walks of life will be coming under threat as employment growth flattens off."

Business Strategies expects base rates to tumble to 4.25 per cent - making euro entry a realistic possibility - as the targeted rate of inflation falls to 2.1 and unemployment creeps up to 5.2 per cent.