Figures that may flatter to deceive: Economic indicators published yesterday were perhaps not as good as they looked, says Robert Chote

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The Independent Online
BRITAIN is enjoying the best possible combination of economic circumstances: growth is robust, unemployment falling, the trade gap stable and inflation quiescent. But this is typical of post-recession convalescence - it is not guaranteed to last.

Yesterday's inflation and unemployment figures both moved in the right direction, but they were perhaps not quite as good as they looked. Inflation fell unexpectedly sharply because of price discounting in the summer sales. But the discounts are no more generous than last year's - the summer sales have simply started later and the price cuts are being concentrated into a shorter period of time.

The drop in the jobless total was the smallest for six months, while the Labour Force Survey shows that the shedding of full-time jobs has resumed after 36,000 were created during the winter.

But the recovery is undoubtedly more robust than most economists were predicting a year ago. Two years after the recession came to an end, growth has at last topped its long-term trend annual rate of around 2.25 per cent.

This means that industry's spare capacity is being used up, with some manufacturers already having difficulty meeting the demands of customers.

Factory output is 4.5 per cent higher than a year ago, while order books are at their best levels for six years. Economists are expecting the economy to grow by a healthy 3 per cent during 1994.

The National Institute for Economic and Social Research predicted yesterday that the economy would follow 3.1 per cent growth this year with 2.9 per cent growth in 1995. It argued that the boost from past cuts in interest rates would continue to outweigh the depressing impact of tax increases until the second half of next year.

The recovery has so far been driven largely by high street spending, although exports and investment by companies in new capital equipment have begun to take the strain. The National Institute expects consumer spending to grow by 3.25 per cent this year, with investment accelerating in the next few months to give 4.3 per cent growth in 1994 as a whole.

Spending on items like furniture, fridges and hi-fi has been subdued, in part because more expensive fixed-rate mortgages have helped to keep the housing market flat. Net borrowing by consumers rose by a record pounds 683m in June, but this was largely the result of people repaying less of their existing debt rather than boosting spending by taking on fresh loans.

The tax increases announced in last year's Budgets have not yet caused high street spending to stall, as some economists feared. But yesterday's inflation figures show that shops and stores are having to offer dramatic price reductions to tempt buyers.

Consumers may also be pushing hard for bargains because they feel insecure in their jobs. Unemployment may have fallen by 340,000 since it peaked at the beginning of last year, but job creation has been subdued and dominated by part-time work for women.

Yesterday's figures show that the fall in unemployment is slowing, that fewer vacancies are being notified to JobCentres and that fewer of these are being filled. The National Institute forecasts that the jobless total will fall to less than 2.5 million by the end of the year, dropping by another 145,000 in 1995.

Weak job creation, higher taxes and depressed pay settlements have meant that economic recovery has not been accompanied by a 'feel-good' factor sufficient to boost the Government's popularity. This presents the Chancellor of the Exchequer with a dilemma as this year's Budget approaches.

Government borrowing is dropping rapidly as the recovery boosts tax revenue and cuts spending on unemployment and other social security benefits. Most City economists expect government borrowing during this financial year to come in at least pounds 2bn below the pounds 36bn forecast by the Treasury in June. As last year's tax rises were justified by the need to balance the Government's books, backbench MPs are telling the Chancellor that he has overdone the medicine and that the dose can now be cut back. A pounds 2bn undershoot would pay for one penny off the basic rate of income tax.