OUTLOOK: Too early to assess the recovery

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The Independent Online
The Organisation for Economic Co-operation and Development is not usually feted for the accuracy of its economic forecasts. But neither is it prone to making controversial assessments of its member countries. The British government must therefore be gratified that the cautious economists at the think-tank are sticking to their line that there is evidence of a better class of recovery this time around.

They reckon the pains of labour market deregulation in the 1980s are now delivering some clear gains. In its latest semi-annual outlook, the OECD predicts Britain will enjoy faster growth than the average for all 25 countries in 1995, and match the average until the end of the century. More significantly, they think the British economy is at last overcoming all those old ills. The reason is that deregulation has improved productivity and limited wage pressures.

The reforms should deliver an unemployment rate consistently below the European average. The OECD estimates that the rate of unemployment below which wage pressures are inevitable - the ``natural'' rate - has fallen, so that it will be possible for the British economy to grow faster than it has on average for the past two decades before running into the inflationary buffers.

Kenneth Clarke, the Chancellor, made the same point to the House of Commons' Treasury and Civil Service select committee last week. Treasury officials had been prudent, Mr Clarke said, to assume in their Budget forecast that trend growth would stay around 2-2.5 per cent. But he believed supply side reforms had improved the trend.

The OECD's economic outlook backs his optimism, but rightly urges caution on interest rates and the public finances. As any forecaster would warn him, when the structure of the economy changes there will be unpredictable results as well as the predictable ones welcomed in the latest report from the Parisian think-tank. It will only be safe to draw firm conclusions about the nature of the recovery when it is over.