Outlook: Champagne times

THERE IS a gilded-age buzz around at the moment, what with steady growth and low inflation and everybody's high hopes for the new economy driving share prices upwards. All that and Christmas too - not to mention the chance to groove on down by the Thames on New Year's Eve.

In the US there is no doubt that something really out of the ordinary has happened to the economy. We are a whisker away from witnessing the longest expansion in American history, virtually anybody who wants a job has one, and inflation is still close to a 30-year low, thanks in part to improved productivity and increased competition.

Still, it is worth spiking the celebrations with a bit of caution. A trend improvement in productivity does not abolish the business cycle. Growth will eventually slow, if only because the Federal Reserve will have to react to rising inflation. Consumer price inflation in the US is already rising, and new figures yesterday showed a further, oil-related, rise in producer price inflation. The UK and Europe are also displaying signs of inflationary pressures.

Besides, the new economy is likely to bring about a certain amount of social and political upheaval if it is as fundamental a change as many investors believe. Over the course of the decade of the 1990s wages in the US have risen by 50 per cent and profits by 100 per cent, and the Dow Jones average has risen by 300 per cent.

While a small number of workers have tasted the fruits of the stock market and profits booms, thanks to stock option schemes, the vast majority have not. What's more, until the past year or two almost all the increase in wages went to the higher paid, as income inequality widened. It defies belief that this will continue for another decade.

The point is approaching when corporate America will have to increase employees' pay at the expense of profit growth. Wage inflation will add to inflationary pressure and take some of the steam out of Wall Street. History adds force to the argument - stock markets might enjoy the first fruits of great technological advances, but the new prosperity leads to a distributional tussle. So it's champagne for "the people" to see in the year 2000.

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