Britain is feeling good again...

Champagne sales are bubbling, house prices are rising, all's right with the Chancellor's world. But will he reap the rewards, asks Diane Coyle
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The Independent Online
Nobody wants to describe what is happening to the economy as a boom. As we know too well, boom leads to bust, and neither the Government nor businesses want the next recession to cast its shadow before the last one has faded from memory. They would argue that Britain has gone beyond the ups and downs of the economic cycle to the promised land of steady, sustainable growth.

So champagne sales are well up. House price increases in some parts of the country have reached double digits. Multimedia computers, the late Nineties equivalent of the mobile phone, are walking off the shelves. Sales of women's designer clothes are surging - even in Leeds, thanks to Harvey Nichols. But so far, this is just an encouraging recovery.

The economic news could scarcely be better for the Conservatives. Consumer confidence, the all-important indicator of how voters are feeling about the Government's handling of the economy, is at its highest level since 1988. Just as important, the housing market has recovered and is releasing hundreds of thousands of home-owners from negative equity.

Only six months ago Kenneth's Clarke's predictions of a recovery in the second half of the year looked like a figment of his cheery imagination. Then tax cuts coming into effect in April delivered the biggest one-off boost to spending power since Nigel Lawson's Budget in the pre-election year of 1986. Although the pundits described it at the time as a modest give-away, the Clarke tax cuts of pounds 3bn were bigger, adjusted for inflation, than the Lawson ones.

Combined with a series of reductions in interest rates starting last December that have taken the cost of a mortgage to the lowest level for nearly 30 years, the Chancellor successfully kick-started the recovery. At the same time, falling unemployment has taken earnings growth up from 3 per cent a year ago to 4 per cent now. Thanks to lower taxes, lower mortgage payments and increased earnings during the past 12 months, a dual-income couple on average earnings with a typical mortgage now has about pounds 200 a month in extra spending power.

The housing market is where the effects have been most dramatic. House prices were flat until the spring but in the space of six months house price inflation has climbed above 7 per cent. Sales of goods related to housing - furniture, carpets, DIY materials, consumer electronics - have risen substantially.

Higher spending power is spreading beyond these homely goods, however. Some of the classic signs of late-1980s froth have returned to the economy. For example, monthly shipments of champagne have climbed above 10 million bottles, a 22 per cent increase on a year earlier. Sales of antiques at the Peter Jones store in Sloane Square have been "very substantial". Spending on eating out is growing at a rate of 30 per cent a year.

Retail specialist Meg Abdy at the Henley Centre says there is general evidence of stronger sales of luxury goods. "The 'sod-it' factor is creeping in. People are a bit more flush with cash and can't keep up the austerity any longer," she argues. Barry Turnbull, city centre manager for Newcastle agrees. "There are no bad weeks at the moment. People are spending freely," he says.

It is hard to see any reason why this momentum should evaporate, despite the straw in the wind of a quarter point rise in base rates a fortnight ago. Pay rises are accelerating as the number of jobless continues to fall - the official total is likely to get below 2 million by the end of the year. Competition between lenders will keep mortgage costs low for some time.

More significant will be the free shares given away by building societies joining the stockmarket in 1997. The value of the handout is put at pounds 20bn. Even if the recipients spend only a fifth of their windfall, it will increase consumer spending by 1 per cent, enough to take the economy beyond sustainable growth.

Yet many retailers are keen to stress that we are not revisiting the errors of the 1980s. According to Andrew Higginson, chairman of the British Retail Consortium's economic affairs committee and finance director of the Burton Group, reports of a boom are irresponsible. "Obviously, you cannot say it will never creep back, but the Chancellor has already raised interest rates to counter a mythical danger," he says.

The same fear, of another increase in borrowing costs that would force them to raise mortgage rates, is making the building societies talk down the danger of an unsustainable housing boom, even though some economists predict house price inflation above 10 per cent next year.

This is a wonderful dilemma for Mr Clarke. Either there is a steady recovery which requires him to do precisely nothing to deliver strong growth in consumer spending between now and May. Or there is a boom, and he can nudge up interest rates to look cautious while reaping any electoral benefits of the feel-good factor. Many experts do not think we will see a re-run of the late 1980s. David Miles, professor of economics at Imperial College, London, says one reason is that further tax cuts are off the agenda, both before and after the election. "We are looking at much more deep-seated fiscal problems than anyone perceived a decade ago," he says.

Others remain sceptical about both the Government's management of the economy and the credit they will get for it. According to Professor Charles Bean of the London School of Economics: "It is difficult to mismanage an upturn from a deep recession, and my hunch is the electorate will think the economy has turned out well despite the Government. The real proof will be how well they manage the boom."