Recovery slow but steady: Strong pound clears the way for Chancellor to boost sluggish manufacturing with interest rate cut

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The Independent Online
THE ECONOMY grew for a sixth successive quarter between July and September, official figures showed yesterday. The Treasury said this proved that the recovery was not faltering, but the Central Statistical Office warned that 'there had to be a suspicion' that growth was slowing.

The output of goods and services in the third quarter was 0.6 per cent higher than in the second, according to the CSO. This was the same rate as in the previous quarter and slightly higher than City economists had expected.

But the Labour Party warned Kenneth Clarke not to be complacent about the recovery in next month's Budget, while speculation that the Chancellor might soon cut interest rates - perhaps by a full point to 5 per cent - continued to gather strength in the financial markets.

Excluding volatile output from the oil and gas industries, growth was a less impressive 0.4 per cent, slowing fractionally for the second successive quarter. The CSO said this suggested that the recovery might be losing momentum, but that the figures were neither precise nor reliable enough to be certain.

Chris Dillow, economist at City firm Nomura Research, warned that the figures were 'extremely unreliable'. He said they appeared to suggest that fears of a slowdown had been overdone, but that there was no real reason for the sceptics to abandon their view. Nervousness about recovery has been fuelled by surveys showing a plunge in consumer confidence and weak exports.

National output has risen by 2.6 per cent in the one and a half years since the recession formally came to an end in early 1992. That is a slightly weaker recovery than followed the 1980-81 recession and less than half as strong as the recovery after the downturn of the mid-1970s. Gross domestic product still has to rise another 1.3 per cent before all the ground lost in the recession is made up.

Growth for 1993 as a whole is likely to be between 1.8 and 2 per cent, well above the 1.25 forecast by Norman Lamont in the March Budget. Most economists expect growth to accelerate to more than 2.5 per cent next year.

But Professor Doug McWilliams, of the Centre for Economics and Business Research, said: 'The economy is starting to slow down. The Chancellor should be very, very cautious on tax increases.' He warned that growth in consumer spending would remain fragile as long as the Chancellor persisted in warning that taxes might rise.

Service industries - which make up nearly two-thirds of the economy - have provided the momentum behind the recovery, with output growing by 0.5 per cent between the second and third quarters. Output from distribution, hotels and catering rose strongly, reflecting continued growth in high street spending. Business services - architects, surveyors, advertising and managment consultants - are doing particularly well.

The economy's most important weak spots are manufacturing and leisure and personal services. Manufacturing output is thought to have shrunk in the third quarter, in part because recession in Europe has dampened export demand.

Thursday's cut in German interest rates - emulated yesterday in France - will go some way to reviving export demand. It may also persuade the Chancellor that he can cut rates here without triggering a fall in the pound severe enough to put unacceptable upward pressure on inflation.

The pound was little changed yesterday, but economists believe it will be pushed higher if cuts in European interest rates continue, as this will make investments in sterling more attractive. The pound's strength is seen by the Treasury as a key indicator of the tightness of monetary policy, so this would give Mr Clarke an excuse to cut rates.

France leads the way, page 23

View from City Road, page 24

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