German inflation figures deal blow to UK recovery hopes

INDEPENDENT British economic forecasters have sharply downgraded their expectations for recovery this year.

The Treasury's latest compilation of 31 forecasters inside and outside the City showed that growth predictions for this year have on average been cut back to 0.4 per cent in June from 0.9 per cent in May.

Even so, the latest average is thought to be well above the Treasury's latest unpublished estimate, which is believed to show that national output in 1992 will be less than the previous year.

Forecasters have also upgraded predictions for the public sector borrowing requirement. Average expectations now centre on a PSBR of pounds 30.3bn for fiscal 1992, up from pounds 28.2bn in May.

Despite the widespread reduction of growth forecasts there appears to be little chance of a reduction in base rates for some months to come.

Official figures out yesterday showed that western German inflation slowed to 4.3 per cent in June from 4.6 per cent in May after a 0.3 per cent rise in the monthly cost of living index. The slight easing in inflationary pressures is unlikely to lead to an early reduction in Germany's interest rates.

German economists said they did not expect a cut in the key Lombard rate from 9.75 per cent - the effective floor for British rates - much before the end of the year. The figures were in line with expectations and are unlikely to influence the Bundesbank, which yesterday stepped up its campaign to dissuade the markets from holding premature hopes of lower German rates.

Gunter Storch, a member of the Bundesbank directorate, said high wages and prices and an 'exceptionally' strong expansion of German money supply meant 'there is not room for easier monetary policy and lower interest rates'.

Inflation in western Germany is expected to ease to around 3.5 per cent in July, when an increase in petrol prices in 1991 drops out of the comparison.

But the Bundesbank is expected to focus chiefly on money supply growth and is not thought likely to contemplate easing monetary policy until the annualised expansion slows to below 7 per cent from the present 9 per cent.

Official British figures yesterday indicated that consumers were increasingly cautious in the first quarter - perhaps because of the approaching general election - but companies began to contemplate recovery.

The personal savings rate rose by 1.5 percentage points to 11.5 per cent, the highest since 1982, despite an increase in real after-tax income of 1 per cent.

Bonus payments ahead of the election, higher dividends and increased capital spending widened the financial deficit of industrial and commercial companies to pounds 4bn from pounds 1.1bn in the previous three months.

Commentary, page 23

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