UK basks in burst of summer sunshine

If you look beyond our shores, a similarly encouraging picture is emerging

SUDDENLY it is summer. No, not because of the weather, but because of the burst of sunshine that has swept across the economy.

Yesterday there were two such bright spots: the CBI estimating that retail sales in June were rising at the fastest rate for more than a year, and the Purchasing Managers reporting that their manufacturing index had gone positive at last. But these only really confirmed a bigger story that has been emerging for some weeks, that the winter lull in economic activity is over. You can see different aspects of that story in the graphs: more confident consumers, rising exports, positive lead indicators for industry, and benign inflation. The rest of this year is going to see decent growth.

If you look beyond UK shores, a similarly encouraging picture emerges. The United States continues to grow above trend and is unlikely to be pulled back by a quarter percent on interest rates. Continental Europe is growing, albeit slowly, and most countries - including Germany and Italy - managed to avoid the technical definition of recession of two consecutive quarters of negative growth. Only Denmark had that. Japan had a rather unexpected return to growth, and while that will not be sustained, the black hole down which the economy was staring seems a touch less dark. Finally, the emerging countries of East Asia (with the possible exception of Indonesia) seem at last to have resumed growth.

Surprised? Well, I don't think we should be. While the US economy continues to grow rapidly it provides a locomotive for the rest of the world. Here in Britain it would be very odd if the time-honoured relationship between interest rates, house prices and consumer demand had broken down: those cuts in rates were bound to give a boost to consumer confidence. Across continental Europe the combination of the weak euro and low interest rates were going to create some growth, though maybe not much. And the world as a whole is probably starting to benefit from the pre-millennium surge in economic activity as companies and governments scurry about trying to fix the Y2K computer bug.

The fact that these measures have not met with universal success - I see that Y2K is being blamed for the passport foul-up - does not alter the fact that the efforts create economic activity. There is little reason to doubt estimates by, amongst others, Goldman Sachs, that fixing the bug will add up to half of 1 per cent on global GNP in the second half of this year. Half a per cent may not sound much, but spread globally it is enormous.

So we can stop worrying about the autumn. The positive response to the Federal Reserve decision further pushes back the problem of how the US will end its long boom, though no one should have expected that one rise in rates would rein back the economy. It will take several before the message gets through.

If we can relax about this year, what about next?

Rather surprisingly, the markets have hardly begun to focus on 2000. Sure, there are economic projections from both official and market sources. Virtually all of these forecast decent growth. Take, for example, the IMF's projections. The Fund put world output up this year by 2.3 per cent, rising to 3.4 per cent in 2000, but with most of the additional growth coming from developing countries: developed country output was only expected to rise from 2.0 per cent this year to 2.3 per cent next. But that is still a rise. Maybe I have missed one, but I have not seen any mainstream forecast that predicts slower global growth next year than this. Only those who believe that the millennium bug will unseat the world economy are warning of serious disruption next year.

Maybe that is why the markets have stopped worrying. What might change this?

Listing what might change a settled sentiment is usually a case of rounding up the usual suspects, of putting a checklist against the indicators and seeing which ones flash red and which flash green. This winter things will be different. The figures are going to be pretty hopeless, for the closer we get to the new year, the greater the distortion of the millennium bug. People will hoard cash, they will buy some goods and some services ahead of the year end and cut back later. Companies will build up stocks of essential items. So the bug itself does not need to be a catastrophe for it to have an impact on behaviour. This autumn, then, the things to watch will not be conventional economic data, but practical numbers which represent actual transactions. From a British perspective two in particular stand out.

The most important domestic indicator will be house prices. These say an enormous amount about consumer confidence, giving in effect a lead indicator of consumer demand. Variations across the country are enormous but it was significant yesterday that the Halifax should report that the housing boom is continuing, with prices up 1.8 per cent in June. If house prices come off, then expect wider effects.

Second, watch sterling for two reasons. The strong pound has contained UK prices and underwritten the falls in interest rates. Were the pound to weaken significantly it might become difficult to hold these lower rates, and a rise in rates would quickly feed through into consumer demand. In addition, sterling will continue to be affected profoundly by the dollar - it moves very closely with the dollar - and watching the pound also means you are watching the dollar. If the dollar comes off it will be a signal that the markets reckon the long US boom will be ending, which would a further reason for concern here.

In short, while house prices and sterling remain strong we need not worry too much about a recession. If either or both come off sharply, then we should begin to worry. And if they don't, enjoy the winter sunshine.