Surge in pound puts a damper on growth

The outlook for growth this year has taken a sharp turn for the worse because of the strong pound, according to one of the country's most respected economic forecasters. The National Institute of Economic and Social Research has slashed its forecast for growth this year by nearly 1 percentage point to 2.5 per cent.

Martin Weale, director of the National Institute and one of the Treasury's six "wise persons", said the rise in the currency since the summer meant there was no need for an immediate rise in interest rates. The Chancellor of the Exchequer will welcome his change of mind, as Mr Weale was formerly one of the strongest advocates of the need for higher borrowing costs to squeeze consumer demand.

Meanwhile the pound fell sharply yesterday as new figures brought further evidence of robust consumer spending. New consumer credit in December exceeded pounds 1bn, while house prices have risen by 0.7 per cent this month, according to Nationwide Building Society.

But there were welcome signs that the housing recovery has not turned into an unsustainable boom. Halifax expects its January house price index due next week to show little change during the month. Separate Bank of England figures yesterday showed a small drop in the value of mortgage borrowing during December, although its year-on year-growth was higher than in November.

The batch of figures yesterday was unlikely to sway the debate at next week's meeting between Kenneth Clarke, the Chancellor, and Eddie George, Governor of the Bank of England, City economists concluded. Few analysts expect Mr Clarke to agree to an increase in base rates despite the likelihood that Mr George will once again recommend it.

The pound is Mr Clarke's strongest argument. Sugar giant Tate & Lyle and engineers Staveley Industries yesterday joined the ranks of companies - including British Steel, Cookson, Guinness, Rolls Royce and Zeneca - whose earnings have suffered from the exchange rate move. However, sterling's index against a range of currencies fell by 0.4 to 95.2, and the pound fell by more than a pfennig to DM2.6463.

Mr Weale writes in the latest review of the economy from the National Institute: "It would be perfectly satisfactory to delay any rise in rates until it became necessary to support the exchange rate."

The new forecast predicts a slowdown in exports growth to about half last year's pace. It also shows the balance of payments tumbling deeper into the red this year and next, with the shortfall between exports and imports reaching pounds 2.8bn this year and pounds 4.4bn in 1998.

However, it still foresees a big increase in consumer spending in 1997 - and reckons this will feed through to a rise of more than 10 per cent in house prices.

Nationwide yesterday reported a 0.7 per cent rise in its house price index in January, in line with recent months. The 12-month increase slowed a fraction to 8.2 per cent. Higher prices were drawing more properties on to the market, making the upturn in sales more broadly based.

Paul Sanderson, head of research for the building society, said: "If previous patterns are repeated, 1997 will see the recovery gain a firmer hold in regions outside London and the South-east, where improvements have been concentrated."

Bank of England figures for December showed a month-on-month fall in the value of net mortgage lending, to pounds 1.6bn, but its year-on-year growth rate climbed to 4.8 per cent.

"The fall in new approvals suggests that the withdrawal of cheap fixed- rate deals is dampening down mortgage demand," said John O'Sullivan, an economist at NatWest Markets.

The Bank of England also reported another pounds 1bn-plus monthly increase in consumer credit in December, which is growing at an annual rate of nearly 17 per cent. It was the fifth increase in six months, and suggests that consumer spending is still growing strongly.

Start your day with The Independent, sign up for daily news emails
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Talent Acquisition Consultant

£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...

Recruitment Genius: Experienced Financial Advisers and Paraplanners

Negotiable: Recruitment Genius: This extremely successful and well-established...

Guru Careers: FX Trader / Risk Manager

Competitive with monthly bonus: Guru Careers: We are seeking an experienced FX...

Guru Careers: Investment Writer / Stock Picker

Competitive (Freelance) : Guru Careers: An Investment Writer / Stock Picker is...

Day In a Page

How to stop an asteroid hitting Earth: Would people co-operate to face down a global peril?

How to stop an asteroid hitting Earth

Would people cooperate to face a global peril?
Just one day to find €1.6bn: Greece edges nearer euro exit

One day to find €1.6bn

Greece is edging inexorably towards an exit from the euro
New 'Iron Man' augmented reality technology could help surgeons and firefighters, say scientists

'Iron Man' augmented reality technology could become reality

Holographic projections would provide extra information on objects in a person's visual field in real time
Sugary drinks 'are killing 184,000 adults around the world every year'

Sugary drinks are killing 184,000 adults around the world every year

The drinks that should be eliminated from people's diets
Pride of Place: Historians map out untold LGBT histories of locations throughout UK

Historians map out untold LGBT histories

Public are being asked to help improve the map
Lionel, Patti, Burt and The Who rock Glasto

Lionel, Patti, Burt and The Who rock Glasto

This was the year of 24-carat Golden Oldies
Paris Fashion Week

Paris Fashion Week

Thom Browne's scarecrows offer a rare beacon in commercial offerings
A year of the caliphate:

Isis, a year of the caliphate

Who can defeat the so-called 'Islamic State' – and how?
Marks and Spencer: Can a new team of designers put the spark back into the high-street brand?

Marks and Spencer

Can a new team of designers put the spark back into the high-street brand?
'We haven't invaded France': Italy's Prime Minister 'reclaims' Europe's highest peak

'We haven't invaded France'

Italy's Prime Minister 'reclaims' Europe's highest peak
Isis in Kobani: Why we ignore the worst of the massacres

Why do we ignore the worst of the massacres?

The West’s determination not to offend its Sunni allies helps Isis and puts us all at risk, says Patrick Cockburn
7/7 bombings 10 years on: Four emergency workers who saved lives recall the shocking day that 52 people were killed

Remembering 7/7 ten years on

Four emergency workers recall their memories of that day – and reveal how it's affected them ever since
Humans: Are the scientists developing robots in danger of replicating the hit Channel 4 drama?

They’re here to help

We want robots to do our drudge work, and to look enough like us for comfort. But are the scientists developing artificial intelligence in danger of replicating the TV drama Humans?
Time to lay these myths about the Deep South to rest

Time to lay these myths about the Deep South to rest

'Heritage' is a loaded word in the Dixie, but the Charleston killings show how dangerous it is to cling to a deadly past, says Rupert Cornwell
What exactly does 'one' mean? Court of Appeal passes judgement on thorny mathematical issue

What exactly does 'one' mean?

Court of Appeal passes judgement on thorny mathematical issue