UK can withstand US downturn, Brown tells MPs

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The Independent Online

Gordon Brown said the UK was in a strong position to withstand a sharp downturn in the global economy.

Gordon Brown said the UK was in a strong position to withstand a sharp downturn in the global economy.

The Chancellor's comments yesterday came as new figures showed that the Government's target measure of inflation edged higher last month, while exports climbed and mortgage lending rose strongly. Economists said the latest news supported the Bank of England's decision to hold interest rates unchanged this month.

The Chancellor stood by his forecasts in the Budget that the UK economy would grow by 2.25 to 2.75 per cent this year, despite the US slowdown.

He told the Treasury select committee: "The US had had a necessary slowdown as a result of very strong growth last year, and we are still vigilant and cautiously optimistic about growth rates around the world. The major economy with which we trade - the rest of Europe - is experiencing growth this year above 3 per cent."

Meanwhile, one of the members of the Monetary Policy Committee sent a clear signal yesterday that he thought interest rates needed to fall further. Sushil Wadhwani said inflationary pressures had been overestimated because of the difficulty of measuring potential output and productivity.

In a lecture at the London Guildhall University, he also warned that the "new economy" might worsen business cycle downturns: "If we have had a period of over-investment, one would expect the subsequent adjustment period to be characterised by unusually low investment."

Yesterday's figures, however, showed no downturn but underlying inflation inching up to 1.9 per cent in February, from 1.8 per cent the previous month; but that remained well below the 2.5 per cent target. The headline rate remained 2.7 per cent last month.

Higher petrol prices and car insurance were the main culprits for the unexpected rise in the target measure. The Budget freeze on alcohol duties put downward pressure on inflation. Some economists believe that inflation will return to a downward trend, forcing the Bank of England to write a letter of explanation to the Chancellor when it drops below 1.5 per cent. But Geoffrey Dicks at Royal Bank of Scotland said: "No doubt the letter is being drafted round at the Bank, but it may not have to be written."

Britain's trade deficit with non-EU countries narrowed unexpectedly to £2.1bn in February, from a record £2.4bn the previous month.

Other statistics yesterday confirmed the buoyancy of the housing market, with new bank and building society mortgage lending of £2.9bn in February.