Growth slows but interest rate picture remains uncertain

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The Independent Online
The economy slowed more than expected as 1997 drew to a close, according to preliminary official figures. Yet even with the leading "dove" on the Monetary Policy Committee sounding the alarm about Asian spillovers, the jury was still out on interest rates, says Diane Coyle, Economics Editor.

National output rose by just 0.5 per cent in the final quarter of 1997, slowing from its 0.8 per cent gain the previous quarter to a pace close to the long-run trend. The forecast was for 0.6 per cent. The economy grew 3.3 per cent in the year as a whole, compared with 2.6 per cent in 1996, the Office for National Statistics said.

"The figures are frustratingly inconclusive as far as the interest rate debate is concerned," said Kevin Gardiner, an economist at Morgan Stanley.

Analysts were fairly evenly split about the chance of a quarter-point increase in the cost of borrowing from the present level of 7.25 per cent in February or March. Although some indicators of growth are pointing down, there is enough evidence of pending inflationary pressure to sow uncertainty.

This was not dispersed by DeAnne Julius, who confirmed her reputation as the most doveish member of the Bank of England's Monetary Policy Committee on interest rates by suggesting that the Asian crisis could trim UK growth by 0.5 to 0.75 per cent. Although it is suggested she will be arguing against a rate rise in the meeting on 4-5 February, many City experts were surprised at the gloominess of her view.

Her comments came as the Treasury announced that Asia will be high on the agenda of the meeting of G7 finance ministers and central bankers in London next month, and also at forthcoming EU meetings.

Gordon Brown, Chancellor of the Exchequer, wrote to Michel Camdessus, managing director of the International Monetary Fund, asking him to attend an EU finance ministers' meeting. He wrote: "European countries have a very substantial interest in the successful resolution of the current financial difficulties in Asia."

Mr Brown also put forward some ideas for handling future crises, including promoting more transparency in economic data and paying more attention to financial stability in emerging markets. He wrote: "I hope we might begin to draw some lessons for the future from what has happened."

Ms Julius, the only member of the MPC to have come from industry, said in her BBC radio interview yesterday: "Given the strong state of the economy at present, that's nowhere near recession levels."

She also downplayed alarmist fears about deflation, saying: "It's too early to declare that the battle against inflation is over and that now the chief enemy is deflation."

Ms Julius' remarks followed a speech by Eddie George, Governor of the Bank of England, earlier in the week saying risks to growth from the Asian crisis were "heavily on the downside".

Michael Saunders, UK economist at Salomon Brothers, said: "I think there probably will not be a rise, but you can see it's going to be a very close decision."

Stephen Lewis, chief economist at Monument Derivatives, said the Asian factor had probably put all the G7 central banks on hold at least until after the meeting of finance ministers and central bankers late next month.

And David Hillier of Barclays Capital said: "DeAnne Julius is clearly not convinced of the need for a further rate rise, but she is probably in a minority."

The uncertainty was reflected in the markets, with the pound slightly weaker mainly due to the dollar. The US currency fell against the yen as hopes emerged that the Japanese government would soon move to boost the flagging economy.

Yesterday's preliminary estimates showed that service sector output picked up slightly during the three months, while manufacturing, energy supply and mining were all weaker. The ONS said the decline in manufacturing output was very small, whereas electricity, oil and gas output was markedly weaker because of the mild weather.

The fact that the official figures for manufacturing output were so subdued was regarded with caution, given the more upbeat signals from business surveys for December. On Thursday the British Chambers of Commerce reported that manufacturing deliveries and orders had actually risen in the final quarter of last year.