Growth slows in UK and US
Thursday 25 May 1995
But growth in Britain is still fast enough for the Bank of England to repeat its call for higher base rates. Another disagreement between the Bank's Governor, Eddie George, and the Chancellor, Kenneth Clarke, is on the cards when they meet in two weeks' time.
Revised figures for GDP in the first quarter showed that growth was weaker than first estimated. It was the latest in a series of recent figures backing the Chancellor, who argued at his last meeting with Mr George that the economy was slowing enough without higher interest rates.
''It is probably not enough to alter the advice the Governor will give, but if Mr Clarke was not persuaded last time he will not have changed his mind,'' said David Miles, an economist at the investment bank Merrill Lynch.
Separate figures on the US economy brought additional relief on the interest rate outlook. Last month saw the steepest fall in new orders for durable goods since December 1991, confirming the slowdown across the Atlantic and suggesting that US interest rates might not rise any further.
Despite the benign international interest rate outlook, many economists reckon there will still have to be an increase in British rates later in the year. ''The economy is still growing above trend. Interest rates will go up - and not too close to the election,'' said Paul Mortimer-Lee, chief economist at Paribas.
Weaker construction was the main reason for the revision to Britain's GDP, which is now estimated to have risen 0.7 per cent last quarter to a level 3.7 per cent higher than a year earlier. The Treasury said the new figure confirmed that the economy was growing at a more sustainable rate. Manufacturing output was nearly flat, while output of the service industries grew strongly, as previously estimated.
The GDP deflator - the widest measure of prices in the economy - brought comfort on inflation. It rose 0.2 per cent in the first quarter, while its year-on-year rate of increase was 1.3 per cent - the lowest for 15 years.
There was more good news in the composition of growth. The biggest contribution came from trade, although this was driven by a decline in imports rather than a rise in exports. Investment spending expanded by 1.8 per cent in the first three months of the year.
Consumer spending fell a shade, its first drop since early 1992. This was surprising, as incomes rose during the quarter. However, spending by Britons overseas is included in the total, and this probably returned to normal in the first quarter after a huge increase at the end of last year.
Only a little more information on the state of the economy is due to be published before Mr Clarke and Mr George hold their next monthly monetary meeting. Most economists in the City said yesterday they expected the Governor to give the same advice as on 5 May, when it seems clear he called for a rise in base rates from the current level of 6.75 per cent.
Steven Bell, chief economist at Morgan Grenfell, said: ''He will still say it would be prudent to raise rates, on balance.'' Although most economic statistics published since the last meeting have gone Mr Clarke's way, growth remains strong and the pound is still far weaker than at the start of this year.
Few analysts expect Mr Clarke to opt for higher rates in June, even if the Governor's advice is unchanged. This was certainly the verdict of the markets. The gilts market soared yesterday and short sterling showed traders trimming their expectations of future base rates.
A strong rally in US Treasury bonds after the release of the trans-Atlantic figures took gilts still higher. The yield on 30-year US Treasuries fell to 6.78 per cent while that on two-year bonds fell below 6 per cent for the first time in two years.
German government bonds enjoyed a buoyant day too, partly because the view that the Bundesbank might cut German interest rates in response to weaker than expected growth is gaining ground.
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