UK economy flashes warning signs of return to Eighties boom and bust

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The Independent Online
THE UK ECONOMY is flashing warning signs of a repeat of the boom- and-bust of the late Eighties that triggered a massive hike in interest rates, an economic consultancy warned today.

An analysis of UK economy in 1999 and 1988 showed that in four key areas - unemployment, exchange rate, savings and the financial deficit of the corporate sector - there are uncanny similarities. House prices and the current deficit are also beginning to resemble the heady days of Thatcherism, Business Strategies said.

In its report, UK in the Global Economy, Business Strategies said there was no immediate danger of a re-run of the boom-bust era unless the growth in spending by consumers accelerated to match Eighties levels. "If that were the case, then base rates would have to go up much higher to quash the demand and the UK would face a hard landing - in other words a return to boom and bust," it said.

"This scenario is indeed a potential risk ... The current state of corporate sector balances and household savings ratios present the same warning signals that were ignored back in the Eighties, eventually imposing a great cost on output and employment."

Andy Schofield, economist at Business Strategies, warned that inflation fears could be re-ignited if the Chancellor used his budget surplus to fund a tax giveaway or a spending bonanza. "It's an outside chance, but we could end up remembering Gordon Brown in the same way as Nigel Lawson."

But Business Strategies said there were "crucial differences" between the two economies. Its comparison showed that in four other key areas - household spending, wage growth, inflation and interest rates - the picture was much more benign. "Inflation is nowhere today. Back then it was bubbling away but the signs were largely ignored," said Mr Schofield.

He said the most important difference was the decision to hand over power to set rates to the independent Monetary Policy Committee. "The response to any acceleration in spending ... is likely to be met with higher rates. Indeed, last week's surprise rise in the light of the benign inflation outlook was almost certainly a response to the strength of household demands."

The report predicted job losses would continue in the manufacturing sector despite signs that output was recovering and suggested the services sector would see slower jobs growth as many businesses had over-capacity.