Where's the feelgood factor?

pounds 20 off mortgages; high street sales healthy; house prices on an upward trend; jobless total falling; inflation record best for half a century, but...

Britain's homeowners received a substantial boost as the Chancellor of the Exchequer reduced the cost of borrowing yesterday for the third time in four months. The cut triggered another salvo in the escalating mortgage price war.

Jubilant Tories with an eye on the general election predicted a return of the feelgood factor after the Chancellor cut base rates by a further quarter of 1 per cent, to 6 per cent.

Kenneth Clarke forecast a bumper year for business, insisting that running the economy properly was a key way of rallying public support behind the Conservatives.

His buoyancy underlined the Government's optimism that the economy will turn out to be an electoral asset, thanks to a tide of helpful figures - a view backed by a Labour peer, the eminent economist Lord Desai. The housing market has started showing signs of recovery, retail sales are climbing, unemployment is steadily declining and inflation has been lower for longer than at any time since 1948.

Mr Clarke is confident that he will be able to reap the benefits of low inflation and steady growth. But even if the headline numbers continue to be so favourable, which other economists still doubt, they will not necessarily deliver success in the polling booths.

A "feel-a-bit-better" factor, against a background of job insecurity and high levels of debt, of renewed decline in manufacturing and falling investment, is unlikely to translate into votes in the same way as ''feel good'' factor.

Yesterday's fall in home loan costs will help a bit. Britain's two biggest lenders, the Halifax and Abbey National, followed by others, swiftly announced mortgage rate cuts that will save borrowers between pounds 7 and pounds 20 a month on an average pounds 50,000 loan.

There are more cuts to come. The Nationwide, which recently undercut most other lenders in order to demonstrate the benefits of remaining a mutual society, said it would respond with a further reduction. Its 6.99 per cent variable mortgage rate remains below the rate of 7.24 per cent most societies announced yesterday.

Mr Clarke decided to cut base rates again because inflationary pressures have continued to recede. His chance came after the Bank of England said recently that the Government was likely to meet its 2.5 per cent inflation target.

The reduction yesterday morning, after the Chancellor's Thursday afternoon meeting with the Governor of the Bank of England, Eddie George, looks at odds with recent signs that the housing market and consumer spending were already recovering. However, in a sign of the diverging fortunes of Britain's ''dual'' economy, the latest figures show manufacturing output in decline, a fall in investment spending by industry and a sharp slowdown in export growth.

Businesses therefore welcomed yesterday's cut in interest rates, with some immediately calling for another, if the economy's slowdown continued. Yet financial markets were lukewarm about the move. Share prices dived after news of astonishingly strong job creation in the US last month destroyed widespread hopes that American interest rates would fall, helping sustain the downward trend here.

City analysts are divided between those who think the Chancellor will push base rates even lower regardless and those who fear he is engineering an upturn which will force him to increase them later this year.

Interviewed by ITN, Mr Clarke contradicted the economic forecasters who are arguing that interest rates will have to rise again later in the year - a development that could militate against the Government leaving the election to the last possible date of May next year.

The Chancellor insisted: "Consumer spending is going to grow this year because are going to have more money in their pockets, real money, not funny inflationary money, not money the economy cannot afford, money that's come because of all the measures that we have taken over the last three or four years. "

He is right as far as this goes. But the Government can not expect much credit for narrow successes with some aspects of the economy when voters' lack faith in the wider framework of its policies for jobs and industry.

Here is the dilemma for the Government: good news for the consumer is irrelevant in an atmosphere of industrial decline and job insecurity.