Outlook: Eco parallels.

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The Independent Online
Outlook: Eco parallels.

YOUR STARTER for 10. Which economy does the following most accurately describe?

Seven years of uninterrupted, low inflation growth has ensured that employment is at record levels, with unemployment falling close to a 30- year low. The tight jobs market is beginning, perhaps, to signal inflationary pressures in the pipeline. On the other hand, the currency has appreciated significantly, keeping inflation low for now, the trade balance has plummeted into the red and manufacturing industry is having to cut jobs.

Why the US, silly. But as Eddie George, Governor of the Bank of England, said in a speech earlier this week, it could equally well be his own description of the British economy.

There is one stark contrast, however. The balance of opinion on the Federal Reserve is shifting towards an increase in interest rates. The Monetary Policy Committee is as close to divided down the middle as nine people can be, with a majority of just one in favour of leaving rates unchanged rather than reducing them. The debate makes it clear that the committee has a bias towards loosening if the exchange rate stays high.

This is topsy turvy. Actually, rates ought to be more likely to go up, on balance, in the UK. The shameful truth is that the British economy has displayed far fewer signs than the US of the productivity gains that might make possible a persistence of the magic combination of low unemployment and low inflation.

While US productivity gains have been galloping ahead at an annual rate of more than 4 per cent in recent quarters, and above its long term average through the long expansion, UK productivity growth has been below trend and slowing. For all the similarities with the American economy, there has been no economic miracle on this side of the pond.

This is a puzzle for those who believe the "new economy" story. The effects of the Internet revolution ought to apply in the UK too. We too have computers and modems, e-commerce and call centres. The electronic "disintermediation" - cutting out the middleman - supposed to be revolutionising corporate productivity (and promising higher returns for shareholders) over there ought to work for us over here too. So far, it doesn't appear to be. With far less of a whiff of economic miracle in the British air, four members of the MPC believe the strong pound justifies further cuts in interest rates.