View from City Road: Pleasing pointers for the Chancellor

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The Independent Online
If the new Chancellor is rash enough to sing in his bath, he might try, 'Everything's Going My Way'. One of the functions of the Treasury's panel of economic forecasters is to provide a rough measure of the way informed and sensible economic opinion is moving, and it is becoming more bullish. The seven wise and fractious men think growth this year will be 1.6 per cent against 1.1 per cent last time. The recovery is patchy, but it is at least a recovery.

On inflation, there is now less scepticism about the Government's ability to steer within its 4 per cent ceiling for the rise in the retail price index excluding mortgages. In February, the group average predicted 3.9 per cent for the fourth quarter of this year, and 3.5 per cent next year.

This time the forecast is 3.3 per cent in both. That partly reflects the recovery of sterling, now down nearly 12 per cent from its Black Wednesday level compared with 16 per cent at its trough. But it also suggests that economists are becoming less worried about the impact of a devaluation on prices when the economy is so depressed.

On financial variables, four of the seven think short-term interest rates will drop again but by no more than one percentage point. By the end of 1994, five of the panel think interest rates will edge upwards again. As for the pound, there is scarcely a sliver between them.

Last night the trade-weighted index closed at 81.3 (1985=100). The wise men think that sterling will be 78.7 at the end of 1994, with a close- knit range from 76.3 to 80.2. This consensus is decidedly odd given the debates about trade and capital flows. Nor, unfortunately, is agreement any guarantee that the panel is right.

One surprise is that there is so little divergence of view about the medium-term outlook, where average growth is projected to continue at roughly next year's rate. Gloomster Professor Wynne Godley is at the bottom end of the range, believing that our trade performance is so bad that growth will have to be very weak to staunch the red ink on the balance of payments.

But no one is prepared to argue that growth will be higher than 3.1 per cent in 1995 or 1996, despite years in which growth has been slower than the economy's capacity.