View from City Road: Brighter outlook for Europe

With each passing day, the Continental European outlook looks brighter. French output in the first quarter rose more strongly than was first estimated and Gunter Rexrodt, the German Economics Minister, in London yesterday, predicted that German growth could be 1.7 per cent this year, as the recovery broadens out to embrace not just rising export orders but stabilising domestic demand.

This is as favourable a backdrop for our own expansion as one could hope for, suggesting that UK growth need not rely too heavily on rising consumption. Export growth, followed by an investment revival, now looks like weighing in more heavily than previously thought. And for once it seems the OECD has got the UK economic scene about right. A draft of its latest report on the UK economy puts growth in the 2.8 per cent range this year quickening to 3.25 per cent in 1995. Investment and strengthening net export growth pitch in alongside rising consumption, as more confident consumers draw down their savings to sustain spending.

The OECD sees little in the way of imminent capacity bottlenecks, partly helped by higher UK productivity. It also thinks UK workers have broken the mould and sustained productivity gains through the recession, in contrast to previous periods in which productivity gains have been confined to periods of expansion.

One warning note should be sounded, however. With consumption at record levels as a proportion of national spending, an early rise in base rates would not go amiss. Especially when City gurus worry that excessive consumption could plunge us into a fresh boom-to-bust cycle, requiring 10 per cent base rates by end 1995.