Outlook: Time pundits took a holiday

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The Independent Online
THERE HAS been no excuse for not taking a winter sun holiday or pleasant skiing trip this year. The Thai baht is at ridiculously low levels against the pound, and the strength of the pound against the French franc has made even the Alps look affordable. Many of us still have money from the building society windfalls stashed away, and the lucky City few banked bumper bonuses this year. It should therefore be no surprise that we splashed out nearly pounds 5bn on foreign trips in the first three months of this year. Judging by the number of Brits doing their own Tour de France for the World Cup this month, it will be even higher in the second quarter.

The interesting question is whether this reflects strength or weakness in the economy. It certainly suggests that British consumers feel happier and wealthier even if that is not justified by the reality. Separate figures yesterday showed that consumer spending at home was still growing nearly 5 per cent in year-on-year terms.

Yet the shock balance of payments figures have given pessimists about growth prospects extra ammunition. Apart from our rocketing spending on travel abroad, investment income from the Far East was down and so were exports of goods.

Two sets of evidence, two sets of pundits. One lot is full of gloomy warnings about recession, the others predicting inflation pressures will force the Bank of England to raise interest rates again. After all, the target measure of inflation could soon hit the 3.5 per cent barrier that will force Eddie George to write an open letter of explanation to the Chancellor.

The truth is that the economy has reached a stage familiar in every business cycle where growth slows, often quite sharply, while inflation carries on rising. There are lags in the inflation process, which even the Bank of England seems to have forgotten, meaning that the peak of inflation is reached at least one year, and more likely two, after the peak rate of growth. This is nothing as dramatic as stagflation, simply the normal cyclical pattern.

That was the main thrust of yesterday's annual report from the OECD. The UK will see much slower growth this year and next, and persistent inflation - and there is not much the Bank of England can do about it. It sounds like time for both the MPC and the City pundits to make the situation worse and take a foreign holiday, far away from this dismal June.