Here is the news - of 1994: The economy

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The Independent Online
THE ECONOMY grew more strongly than most pundits forecast in 1993, but it will be weaker than they expect in 1994 as the biggest package of tax rises since the war takes effect.

Kenneth Clarke forecast in his Budget that national output would rise by 2.5 per cent this year. This will be achieved only if he cuts interest rates quickly and by more than the half-point assumed in the forecast. He probably will not.

The Treasury is also too optimistic about the boost to exports from expanding world trade. The Central Statistical Office will find that Britain's trade performance last year was notably worse than it had first calculated. The Bank of England will blame exporters for raising their prices too much.

Economists were surprised by last year's fall in unemployment, which was bigger and earlier than all of them expected. They now expect it to go on falling, but there will be a worrying few months when it rises again. Job creation will still be dominated by poorly paid, part-time work for women.

Price increases should remain subdued in 1994, encouraging more misplaced complacency about permanently low inflation. But it will stay low only because the economy is weak. It will look like rising uncomfortably in 1995, although by then the Treasury may have tried to massage the figures lower by getting the method of calculation changed. More Treasury officials will defect to the City as Mr Clarke ignores their advice and management shake-ups limit their promotion opportunities.

Unless the Chancellor cuts interest rates sharply, the pound will end 1994 stronger than it is now. Share prices will suffer a setback on fears that recovery is fading, but should still end 1994 higher.

The Chancellor may decide not to replace Andrew Sentance, who resigned recently as one of the 'seven wise men' who provide him with independent economic advice. He will treat the seven with as much indifference in public as he does in private. He may even dispense with their services.

Mr Clarke may also U-turn and announce that the Bank of England is to be given independent control over interest rates. Neither he nor his two predecessors has had to raise interest rates. When it becomes unavoidable, he may decide to let the Bank take the blame.

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