Inflation up, unemployment rising, house sales flat. Is there a recession on the way?

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The Independent Online
IS THE FIRST Labour Chancellor in nearly two decades on the verge of plunging the economy into recession? And if he is, why on earth is he letting the Bank of England's nine monetary eggheads loose to raise the cost of loans?

The impression given by recent headline-hitting figures is that Gordon Brown is steering straight towards a recessionary iceberg. Yesterday, for example, the number of people claiming unemployment benefit rose for the first time in two years.

At the same time, earnings growth has burst through the 5 per cent barrier, certain to make the bank's Monetary Policy Committee itch to increase interest rates again.

The prospect of still tougher interest levels when the jobless rate might be starting to rise brought a dismayed reaction from business and unions.

This has come on top of other recent news that the strong pound has brought exports growth to a halt. Manufacturing output is stagnant. Sales volumes on the high street are growing more slowly and what once looked like a housing bubble, at least in London, has petered out.

But it is pure nonsense to suggest that all this inevitably points to recession ahead. Although it would be as daft to rule it out entirely as it would be to say hurricanes never hit Britain, recession is less likely than the rather less attention-grabbing truth that we are in for - neither boom nor bust but something in between.

As Gerry Holtham, head of the Institute for Public Policy Research and a former City economist, put it: "For the pundits, it has to be either economic miracle or economic collapse. Nine times out of 10 it's neither."

Some bits of the British economy are doing badly while others are doing very nicely indeed.

The debate is pitching the sufferers, mainly in industry - who want lower interest rates, a weaker pound and galloping growth to bail them out - against the far less vocal majority who would rather not have higher borrowing costs but can live with them.

On one side of the scales is manufacturing. Output in February to April was virtually the same as a year earlier, and has climbed only 4 per cent since the peak of the last business cycle in 1989. Employment in industry is flat, too.

Bill Good, managing director of Sterling Tubes, a Midlands-based manufacturer, said: "Manufacturing is taking the full pain and strain of the Government's fight on inflation.

"The rapid rise of the pound has seriously affected our margins. As a result, we have had to lay off 17 per cent of the workforce on one site - around 40 people."

There is little doubt that it is going to get worse. Export orders and confidence have tumbled. Recession will hit manufacturers and their workforce, especially in the parts of the country where industry is most concentrated.

Yet the Chancellor and the Bank of England can point to plenty of evidence on the other side of the scales.

For example, yesterday's figures showed a big increase of 61,000 in economy- wide employment in the latest quarter, while the more reliable survey- based measure of unemployment also fell, by 35,000. And economists warned the small rise in the claimant count could easily be a one-off blip rather than the start of a trend.

More worrying was the evidence that pay pressures are increasing. Average earnings rose by 5.2 per cent in the year to April, well above the limit compatible with the Government's 2.5 per cent inflation target.

Even stripping out bonuses, which critics of the Bank of England like to do, private sector pay grew by 5 per cent. In fact, excluding the bonus element makes the trend look worse, as basic earnings have accelerated at an even steeper pace than the total.

Business is hitting back at the Government's exhortations to keep pay under control. Andrew Smith, the Employment minister, predictably said the figures sent "a sharp warning signal that responsibility all round on pay is called for".

John Entwistle, president of the British Chambers of Commerce, hit back. Speaking from the BCC's annual conference in Birmingham, he said: "Politicians do not have to nanny business to keep wages in check. The aim of business is to minimise costs but many increases are a necessary response to skills shortages in key areas."

The industry lobby likes to blame the earnings and inflation problem on financial services and information tech-nology, the fastest-growing parts of the economy. Their fat cats make an easy target.

But even if it were true that earnings in manufacturing were languishing - and it is not, for they have picked up smartly too - pinning the blame for inflationary pressures on particular sectors is scarcely a knock-out argument. The two most buoyant areas, business and financial services and communications, account for 28 per cent of national output.

This is bigger than manufacturing, whose contribution to GDP is 23 per cent and shrinking. If there is a tail trying to wag the dog in the current policy debate, it is industry and not finance.

It is prospects for finance, business services such as accountancy and information technology that will probably preserve the economy from an outright recession.

Spending on IT, for example, is more than booming, and not just for the obvious reasons like the launch of the single currency and the millennium bug. There is also a huge backlog of business spending on upgrading software and computer systems and a massively expanding consumer market.

A spokeswoman for AIT Limited, an IT company based in Henley-on-Thames, Oxfordshire, which yesterday announced a 40 per cent surge in annual profits, said: "We've experienced no difficulties whatsoever. Costs are way down on our customers' lists of criteria."

The outlook for construction is also favourable. Although speculative office and retail developments are vulnerable to a loss of confidence, the latest official figures show a strong upward trend in commercial building. Big infrastructure projects already planned or underway - not least the Dome - are also underpinning the industry.

Malcolm Clarke, contracts director of Kent-based Baxall Construction Limited, said: "We've been quite successful over the past year. There is a more confident business environment among our clients, and there has been a move towards greater efficiency within the industry.

"In fact we have been confident enough to increase the size of our organisation by around 15 per cent last year, and are looking for 5 to 10 per cent growth this year."

If a recession were obviously looming, Gordon Brown and the egg-heads would have an easy job. Their task is actually much harder: steering a course between the conflicting interests that make up a modern economy like Britain's.

Hong Kong slump worsens,

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Business, page 17

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