North `to suffer recession this year'

Divided Britain: South-east enjoys boom as decline in engineering industry is expected to cost up to 100,000 jobs

LARGE AREAS of northern England will plunge into recession this year, says a report today that highlights the growing divide between the North and the South.

In the North, the economy is shrinking, employment is falling and house prices are stagnant while the South-east is enjoying powerful growth, an economic research group said.

The report - latest to revive fears of the boom-bust pattern of the late Eighties - comes a day before the Bank of England decides whether to raise interest rates for the first time in a year. Cambridge Econometrics said that GDP - economic growth - would fall by almost 1 per cent in the North and by 0.2 per cent in Yorkshire and Humberside this year with zero growth in the East Midlands.

London would enjoy almost 2 per cent growth, followed by 1.2 per cent in the South-west and 1.1 per cent in East Anglia.

The group said the sharp decline in manufacturing industry had hit the northern regions hard. Output in that sector is expected to fall by up to 4 per cent. The huge growth in jobs in the services industry will make up for the fall-out in manufacturing, but the North is the only region where total employment will fall, by 0.7 per cent this year and 0.4 per cent in 2000.

Manufacturers are cutting jobs at the fastest rate since the recession of 1993, and in engineering alone employers expect to cut 100,000 jobs this year.

Cambridge Econometrics said problems in the manufacturing regions were made worse by the high level of the pound, hindering companies trying to export goods.

In London, the growth in services and construction will drive the economy ahead. "Speculative developments in the City continue for the construction of office accommodation for financial services," it said. "Despite its high base, London is also benefiting from the development of specialised call centres requiring multi-lingual staff."

The report comes a week after Nationwide, the country's biggest building society, said house prices in areas of some Northern cities were falling while parts of London were enjoying annual surges of up to 27 per cent.

And a report from the Confederation of British Industry last week highlighted the most severe shortage of unskilled labour for 25 years, with the problem most severe in the South.

The mixed fortunes for the country's economy will cause a headache for the Bank's committee of economists, which sets interest rates to control inflation at 2.5 per cent.

A hike in rates to dampen down signs of a boom in the South would make it harder for businesses to borrow and could send the value of the pound even higher.

The report from Cambridge Econometrics will bring back memories of the Eighties when booming demand and output in the South sat alongside depression in the North.

Then, high house prices made it hard for unemployed people to move to where the work was, driving up wage inflation and triggering rate rises. Adam Cole, an economist at HSBC, said: "The current mix of growth looks worryingly similar to the 1980s."

But recent figures show the pressure on production costs may be easing, with manufacturing moving out of recession and few signs of inflationary pressures in the pipeline.

Most economists do not expect interest rates to rise before next year, but the money markets are more gloomy, pricing in a rise of about 1.75 points by the end of 2000, taking them to 6.75 per cent.