Treasury to lower growth expectations

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The Independent Online
The Treasury will revise down its growth target for the economy this year in its summer forecast, due to be published early in July, despite Chancellor Kenneth Clarke's insistence that strong consumer spending will boost the economy.

The move is likely to increase pressure from Conservative backenchers for further cuts in the cost of borrowing later this year. Many see buoyant growth as essential to their re-election chances.

City analysts do not, however, expect Mr Clarke to rush to reduce base rates after his monthly meeting this morning with Eddie George, Governor of the Bank of England. The Chancellor has cut rates three times since December to their current 6 per cent level.

In last November's Budget Mr Clarke predicted 3 per cent growth in GDP in 1996. The Treasury is likely to cut this to 2.5-2.7 per cent, reflecting weaker export markets and continuing stagnation in manufacturing industry.

The Treasury's caution mirrors similar revisions by other forecasters - including some of its panel of "wise persons" - who had been relatively optimistic about the pace of growth.

The Organisation for Economic Co-operation and Development will publish a revised outlook for the UK at the end of this month showing that its experts are not confident of a significant pick-up in the economy during the rest of this year. It will cut its forecast from the 2.4 per cent published in December, although the downgrade is unlikely to be as dramatic as draft documents have suggested.

The tone of the think-tank's annual report on the UK remains optimistic about the medium-term outlook for the economy. But, given the potentially embarrassing downward revision ahead of an election campaign, its publication has been brought forward as early as possible from the usual midsummer date.

Other prominent economists are shading down their predictions for growth this year. They include the London Business School, whose latest outlook was released last week, and the National Institute for Economic and Social Research, which publishes a new prediction in 10 days' time.

Andrew Sentance, director of the LBS's Centre for Economic Forecasting, said: "The rate of growth is likely to pick up during the course of this year, but it would not be credible for the Chancellor to stick to a 3 per cent forecast." The Treasury would have to concede that the international environment had weakened, he said.

Martin Weale, director of the institute and one of the Treasury's panel, said: "It would be too pessimistic to predict that there will be no improvement during the year. However, the Chancellor's chance of meeting 3 per cent is only one in five. It is not very likely."

The financial markets also expect the economy to strengthen. Traders in the futures market are betting that base rates will start rising from their current level by the autumn.

Recent preliminary figures show that the economy grew by 0.4 per cent during the first quarter of this year, taking GDP to a level only 2 per cent higher than a year earlier. The Office for National Statistics reported that the service industries expanded by 0.5 per cent during the first quarter, down from a 0.8 per cent increase in the final quarter of last year.

But many economists think the preliminary estimates will be revised up, as they were for the fourth quarter of 1995. Some forecasters who had been at the pessimistic end of the range about this year's outlook have recently upgraded their figures.

The Treasury's monthly summary of forecasts for the UK economy showed that the average new prediction for GDP growth in 1996 was 2.4 per cent, up from 2.3 per cent.