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Treasury model indicates robust year ahead

BRITAIN should enjoy a year of robust economic growth and low inflation, with no pressing need either to raise or lower interest rates, according to the computer model of the economy used by the Treasury to advise the Chancellor.

Growth in national output and the rate of inflation should both average about 2.75 per cent this year, but the economy could slow down as the next election approaches, posing a dilemma for the Chancellor and the Prime Minister.

But the latest report from the Item Club, a group of independent economists who use the Treasury model under sponsorship from Ernst & Young, concedes that there are considerable uncertainties about the economic outlook - the recent fall in confidence among consumers and the financial markets could spread to businesses, while the amount of spare capacity in the economy could also turn out to be smaller than it appears.

These concerns are mirrored to some extent in the latest twice- yearly survey of small and medium- sized businesses by 3i and the Cranfield School of Management. The survey shows that Britain is a year ahead of most Continental European countries in emerging from recession, but that roughly the same proportion of companies expect the economy to worsen as to improve. 'The situation has not changed much since the last survey indicating that any recovery from recession is fragile and may well have stalled,' the report said.

Infolink, the credit information company, reported that demand for new loans to buy cars was nearly 17 per cent above last year's levels in February, but the growth in demand for loans for house purchases, consumer goods and from finance houses was lagging behind.

'While consumers may feel uncertain about the real impact of April's tax rises on their personal finances, our figures suggest that consumer confidence in February was relatively sound,' said Brian Bailey, Infolink's chairman. 'However, credit applications and subsequent sales in the coming months will confirm the true response to a reduction in disposable income.'

Item said the Chancellor might opt for a token cut in interest rates from 5.25 to 5 per cent to offset the tax increases, but that rates would then remain steady before rising next year to slow the economy into 1996.