Strong growth fuels gloom

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The Independent Online
News that Britain's national output had increased by more than expected in the last quarter of 1994 added to the gloom swamping the financial markets yesterday. Shares in London lost £9.9bn in value, and Wall Street fell sharply as traders expected higher interest rates in both Britain and the US early next month to relieve the inflationary pressure being created by strong economic growth.

Britain's gross domestic product grew 0.8 per cent in October-December, the same as the previous quarter, according to the Central Statistical Office's preliminary estimate. The year-on-year rate of expansion edged down to 4 from 4.1 per cent. Excluding oil and gas production, the annual rate of growth increased from 3.6 to 3.7 per cent in the fourth quarter.

The statisticians estimate that industrial output grew more slowly towards the end of 1994. Indeed, it fell in November, the latest available figure. The service sector grew at about the same rate, 0.8 per cent, in the fourth quarter as the third. Business services, transport and communications were the fastest-growing areas.

The CSO said construction rebounded in the final months of the year, reversing an earlier dip. However, this is unlikely to be sustained, according to the Building Employers Confederation. It said the fragile recovery in the construction industry had been severely dented by a sharp reduction in inquiries for new work and in expectations of future output growth.

Sir Brian Hill, BEC president, said that the results of the survey for the fourth quarter of 1994 showed that the construction industry had suffered a "serious" setback.

"Far from any signs of overheating, the industry is delicately balanced between further slow growth and the serious risk of the recovery juddering to a halt," he said.

Despite the evidence of areas of weakness in the economy, many City analysts think recent figures point to a February interest rate rise. Helen MacFarlane, an economist at Hoare Govett, the securities firm, and former Bank of England official, said: "Themix of growth does matter - the bottlenecks are occurring in manufacturing, not construction. But I think the Bank of England has no choice but to push for higher rates."

Whether the Chancellor will accept this recommendation is thought to be a close call. The Confederation of British Industry's quarterly industrial survey published this morning could prove decisive. It will report manufacturers' expectations of future output, prices and orders, and is likely to indicate more price pressures.

With an increase in US rates also on the cards, shares fell in London and on Wall Street as well as Far Eastern stock markets. The FT-SE 100 index closed 40.8 points down at 2,954.2.

At noon, the Dow Jones index was 25.9 points lower at 3,843.5. Gilts and US Treasury bonds also fell.

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