Inflation set to rise as growth slows in 1998

The economy will slow down sharply next year after this year's election- related boom, according to two sets of forecasts published today. The next government is likely to inherit rising inflation and weaker growth in 1998.

Chancellor Kenneth Clarke has successfully engineered a pre-election boom whose costs will not be felt until next year, a report from Oxford Economic Forecasting claims. Not only does this boom not seem to be improving the Government's popularity in the opinion polls, it says, it also "presents the next government with a legacy of both rising inflation and a manufacturing sector suffering under an uncompetitive exchange rate".

The warning is echoed in separate research published by City investment bank UBS. Its latest economic forecasts predict a sharp slowdown in GDP growth between this year and next, and an increase in the underlying measure of inflation to well above the Government's target.

Both sets of experts see the strong pound biting into investment and exports, although soaraway consumer spending will offset these effects for most of this year.

But the higher pay increases that have been triggered by big falls in unemployment will also be feeding through to inflation next year. While neither forecast sees inflation climbing very far, at least by comparison with past experience, it is likely to be significantly above the 2.5 per cent target set by the Conservatives and adopted by Labour.

Figures last week showing an unexpected increase in earnings growth alarmed economists, who saw it joining record consumer credit and rising house prices as an inflation alarm bell.

Both the Oxford group and UBS see the pace of growth declining from about 3 per cent this year to 2 per cent or less next year. They predict that underlying inflation will rise from below to above 3 per cent.

A dissenting view is contained in a separate report today from consultants at the Centre for Economic and Business Research. According to Professor Douglas McWilliams: "Labour has never come to power before with the economy in such good shape. The challenge for them, if they win this time, will be to keep it there."

He reckons the strong pound will not outweigh the impact on growth of strong consumer spending and the possibility of higher public expenditure under a Labour government. The inevitable slowdown will not come until 1999, he predicts.

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