Growth outstrips forecasts: Output figures beat City and Treasury expectations as Clarke plans Budget

KENNETH CLARKE began planning his strategy for November's Budget at the Foreign Secretary's country residence of Chevening yesterday, as official figures showed that the economy is growing more rapidly than the Treasury forecast last month.

Cuts in public spending plans were high on the Chancellor's agenda, with senior Treasury officials, political advisers and junior ministers also taking part in the discussions. The Treasury does not want to loosen its grip on public spending, even though the rapid growth of the economy is likely to cut government borrowing relatively rapidly.

National output of goods and services rose by 0.9 per cent between the first and second quarters of 1994, a rate not exceeded for nearly six years, according to the Central Statistical Office. This was a slightly bigger rise than the City forecast and slightly higher than the Treasury predicted in its summer forecast. Excluding volatile oil and gas production, the economy grew by 0.8 per cent and on this measure has now more than reversed the 3.8 per cent fall seen in the recession.

Growth was stronger in industry, transport and communications than in service industries, which suggests that recovery may be being driven less by consumer spending and more by investment and exports. Industrial production rose by more than 1.3 per cent in the second quarter, with construction rising by around 1 per cent and service sector output by a relatively modest 0.6 per cent.

The economy has been growing for more than two years and there is no evidence yet that tax rises are slowing the rate of growth.

'We are seeing the sort of recovery we want to see - steady, increasingly broadly based, with unemployment falling and inflation remaining low,' Mr Clarke said. 'I intend to make sure we turn this favourable combination, not into a boom which goes bust, but into an upswing which lasts for many years.'

National output was 3.3 per cent higher in the second quarter than a year earlier and 2.7 per cent higher after excluding oil and gas. This shows that the economy has been growing more rapidly than its long- term trend rate of 2-2.5 per cent, which means that the so-called 'output gap' is closing as the economy's spare capacity is used up.

This might bring an upsurge in inflation closer, although economists at the stockbroker James Capel estimate that the economy is still running with 4 per cent spare capacity.

Kevin Gardiner, economist at Morgan Stanley, said the inflationary implications of the economy's robust growth meant interest rates might rise as early as September or October. He predicted that base rates would have risen from their current 5.25 per cent to 7 or 8 per cent by the end of next year.

Andrew Cates, economist at UBS, said that the CSO's figures might even be understating the growth of the economy, as reflected by problems with the trade figures, the rapid growth of the amount of the cash in the economy and evidence from surveys by the Confederation of British Industry. The figures contributed to an upbeat mood in the stock market, where the FT-SE index of 100 leading company shares rose 19.6 points to close at 3,114.7.

The pound was little changed, with attention on the foreign exchange markets again focused on the dollar as Alan Greenspan, chairman of the US Federal Reserve, gave testimony again to Congress.

The US currency strengthened in anticipation but weakened as Mr Greenspan added little new to his comments on Wednesday. He argued that a stronger dollar would be beneficial, but failed to signal an imminent rise in US interest rates.