Pain on home front keeps exports flowing

THE RISE IN INTEREST RATES: Mortgage-holders and small shopkeepers will be hit hardest but recovery is `past its peak'

The Governor of the Bank of England says the economy's recovery is past its peak. Growth is beginning to slow down.

The assessment by Eddie George raises two questions. Who enjoyed the recovery? And if it is slowing down, why did he see a need to raise interest rates again yesterday?

There has been, notoriously, no feelgood factor since the recession ended more than two years ago. Britain has had what the Chancellor, Kenneth Clarke, refers to as balanced growth, but others might consider have been simply patchy.

Thanks to the unplanned devaluation of sterling when Britain bumped out of the European exchange rate mechanism in September 1992, exports have boomed. Last year the volume manufactures exported rose by an unusually healthy 6.5 per cent.

Export orders are still extremely healthy. The Confederation of British Industry reported in a recent survey of member companies that in the next four months they are likely to reach a record high. Beyond manufacturing industry, though, the fruits of recovery have been distributed thinly.

Homeowners who cannot sell up or employees who fear for their jobs feel they are suffering the hangover without having been to the party. House prices are the same now as they were when the recovery started. More than a million people are still trapped by ``negative equity'' - a house worth less than their mortgage.

Even though houses are more affordable than they have been for some years, no one wants to move. The number of first-time buyers actually dropped at the end of last year.

Higher interest rates, which will ultimately lead to higher mortgage costs, are clearly not going to help kick-start the housing market. Yet they are still low by the standards of recent economic history. What is more, the economy is creating lots of newjobs - 35,000 to 40,000 a month. A healthy job market would normally spill over into a healthy housing market.

The reason the housing market remains mired in depression has more to do with psychology than economics. The banks and building societies reckon people still want to own their own home, but are not confident about making the biggest purchase in their lives because of job insecurity. The Civil Service was once the place to work if job security and a steady pension was what you were after. But even civil servants are no longer safe from redundancy, as the trimming of a quarter of the Inland Revenue workforce shows. Traditionally secure white-collar jobs have become as vulnerable as shop and factory floor ones always have been. Lots of people are getting jobs, few are confident of keeping them.

The professional elite of the labour market is also having to adjust to different and more insecure patterns of work, including short-term contracts or self-employment. Government policies such as cut-backs in mortgage interest relief and social securitysupport for mortgage payments are scarcely helping.

Other parts of the economy that depend on consumer well-being are suffering too - particularly retailing.

The British Retail Federation's reaction to yesterday's interest rate rise was almost fatalistic - there has been so much bad news that a bit more hardly makes a difference.

It reckons many small, local shops, having lost out to malls and supermarkets, have been trading unprofitably for a year or more. Many will go out of business, and the latest base rate rise will be another nail hammering the boards over high street shop windows.

Unfortunately, home-owners and small shopkeepers are forced to bear the pain of higher interest rates and slower growth so the parts of the economy that have benefited from the recovery can continue to do so.

Manufacturing output has been belting along at such a pace that companies are beginning to report they are working at near-full capacity.

Their natural reaction to strong demand is to try to raise prices, in the process passing on some huge increases in raw material costs. The price of materials such as plastics and steel products have risen by 35-65 per cent in the past 12 months, according to trade bodies. Those increases have yet to filter through to official statistics, but the Bank of England is well aware of the danger.

So, even though the growth of national output has shown signs of slowing, the Governor and Chancellor have agreed it is still too fast for their comfort. Hence yesterday's judicious touch to the monetary brakes.

Mr Clarke hopes this recovery, driven by exports and industry, will break the mould, and that if it does we will all end up feeling very good indeed.

A bit more braking is likely before they have finished, on the Bank of England's ``stitch in time'' theory. Their hope is that early action will mean interest rates do not have to rise into double figures as they have in previous recoveries, dragging economic growth screaming to a halt.