UK economy to lead the way in Europe

City economists predict the UK will be the star performer among the European economies in 1997 with few, if any, warning signs on the horizon to lower expectations of a further year of progress.

Investors are also relaxed about the outcome of the election: whoever wins is expected to continue on a similar track, with an economic diet of fiscal rectitude and a steady hand on the tiller.

However, there is a strong possibility Labour will call a snap Budget if it wins, which raises the odds of higher personal taxes by the year end.

Whether this translates into another boom year, however, for the stock market remains less certain.

Some strategists are predicting levels similar or slightly lower to where the FT-SE 100 index of blue chip stocks ended the year - just over the crucial 4,000 level.

Nick Knight, strategist at Nomura International, predicts the market will close at 3,800 - a fall of about 300 points.

The FT-SE's rally in July caught many forecasters by surprise. Few had predicted the market would end the year poised above 4,000 at 4,091, so most are forecasting only modest gains throughout the course of next year.

Legal & General Investment Management predicts the index will close at exactly 4,000 in a year's time. The consensus, however, is for a rise to 4,200.

Peter Sullivan of Goldman Sachs, meanwhile, has adopted a moderately bearish tone. He sees interest rates rising, "and when investors see that, they will turn more hostile." He also believes that the growth in corporate profits will slow, from around 16 per cent a year to around 10 per cent, with the index reaching 3,950.

Outside the UK, there is division surrounding the world's two other leading stock markets, Tokyo and Wall Street.

Events over the last few days in Tokyo, with another mini-crash, have once again emphasised the fragility of the Japanese economy. On Thursday it fell 700 points to its lowest levels in a year, closing at 19,291.58. Despite cuts in interest rates to record lows, there seems little sign of an imminent pick up. Pundits have been calling the bottom of the Japanese market since 1990; there seems little reason why 1997 should prove any different. Over the last week, the market has tumbled again, with the weakness of the Yen another undermining factor.

"A slide in forecast GDP growth to 1.4 per cent from the 3.6 per cent expected this year tells its own story," Nomura's Mr Knight says, forecasting no more than 0.6 per cent economic growth in Japan in 1997. However, Save & Prosper, the fund manager, is brave enough to be among those who are prepared to call the bottom: it expects the Nikkei to bounce back to 25,000 - while Wall Street will dip after profit taking hits the Dow in the first half, although there will be a rally in the second half.

In the US, the economy has continued a steady recovery which started in 1995, and there is every sign this should continue. However, Simon Briscoe, of Nikko Securities, believes the future remains ambivalent. "The US economy has been growing steadily, with no sign of any monetary tightening, and so far the markets have been happy to support an optimistic outlook."

But, as recent jitters have shown, big surprises over there will have big repercussions here.