Treasury warns that recovery may lose momentum: 'Premature to state unequivocally that the peak in unemployment has passed'

THE TREASURY warned yesterday that the unexpectedly strong economic growth in the first half of the year could have been a temporary surge and unemployment might still rise back above 3 million.

The Confederation of British Industry, meanwhile, raised its growth forecasts for this year and 1994. Its latest monthly survey of manufacturers reported a rise in order books to a three-and-a-half-year high and a surge in forecasts of factory output.

The latest Treasury Bulletin concluded that growth in national output this year was likely to be higher than the 1.25 per cent predicted in the March Budget and that underlying inflation would probably turn out lower than the 3.75 per cent forecast for the fourth quarter. But the unexpectedly good news in the first half might not extend to the rest of the year.

'Recovery has so far been stronger than forecast at Budget time, but (we) cannot yet conclude that this faster than expected rate of growth will necessarily continue,' the Treasury argued. The article warned that the surge early in the year could have been the temporary result of discounting in the shops or the reluctance of manufacturers to raise their prices.

The Bulletin also adopted a more cautious tone on unemployment, arguing that it was 'still premature to state unequivocally that the peak in unemployment has passed'. This suggests the Treasury still fears the reversal of the 80,000 fall in the jobless total since January, although the Bulletin added that it was 'unlikely' that unemployment would top the 3.12 million peak reached in the mid-1980s.

Elsewhere in the Bulletin the Treasury stepped up its summer campaign to prepare the ground for public spending cuts, arguing that structural increases in some areas of spending threatened the Government's ability to reduce taxes and cut borrowing.

Government spending has been increasing at an unsustainable rate since 1988-89 after considerable success in reducing spending as a share of national output in preceding years.

Root-and-branch reviews of spending on social security, education, health and the Home Office are expected to produce savings for the coming public spending round, especially in plans for spending in 1996-97.

The CBI increased its forecast for economic growth this year from 1.6 to 1.7 per cent and for next year from 2.6 to 3 per cent. August's improvement in order books reflected higher domestic spending, with export order books little changed.

Andrew Sentance, CBI chief economist, predicted 18 months of steady growth and low inflation. He said growth this year would be driven by consumer spending, a conclusion that received support from an acceleration in the growth rate of the narrow money supply measure M0 - largely cash in circulation - to around 5.4 per cent this month. The official estimate of the fall in national output last year was also revised from 0.5 to 0.4 per cent.

Mr Sentance said he remained worried by the slow growth of investment and the persistence of the trade deficit and high government borrowing. But the survey was sufficiently upbeat to produce a 2.25 pfennig jump in the pound when details were leaked, with Salomon Brothers rumoured to be the buyers of sterling.

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