Why a Clarke boom is bad for the stock market

Just 7.8 points to go. Bears of the stock market, which include this column, are having to eat their words once more as the soar-away FTSE 100 index powers to within a whisker of the 4,000 mark. It is easy to see why this is happening. As yesterday's buoyant Purchasing Managers Index confirmed beyond any doubt, we now seem to be in the throes of a fully fledged pre-election boom. And as Kenneth Clarke, the Chancellor, was only too keen to stress at the IMF meeting in Washington yesterday, there appears to be nothing on the horizon to cloud this glorious picture of non-inflationary growth.

Mr Clarke, naturally, cites 17 years of Conservative Party reform - privatisation, deregulation and flexible labour markets - as the underlying cause of this success. Despite his location, however, Mr Clarke is a man speaking primarily to his electorate. The international bankers and finance ministers who were his audience yesterday might beg to differ just a little from this analysis. On most conventional measures, the UK economy is indeed performing exceptionally well right now, but this has as much to do with external factors, luck and some good old-fashioned pump priming ahead of the election as anything else.

Inflation is in abeyance not just in the UK but almost everywhere that counts. Also buoyed by a man with an election to win, the US economy, too, is booming. Even on the Continent growth seems to be picking up. Britain's economic performance may look a bit better than elsewhere, but this is hardly evidence of an economic miracle in the making.

By contrast, there is growing evidence of the reverse, that what we are witnessing here are the beginnings of a boom that, if it is not going to end in quite the same calamitous bust of the past, might well leave us all with some kind of mild hangover. The signs of this are all over the place but they are to be found in their most compelling form in the housing market - which, if you live in certain parts of London, is most definitely booming again - and, yes, in shares themselves, which are showing investment bubble-like characteristics.

Mr Clarke is probably right to insist that this is no repeat of the Lawson boom. A cautious Budget on 26 November will underline the differences. But nor is the outlook quite as cloudless as he claims. Inflation will be rising again, possibly quite sharply, within a year. Meanwhile, it seems highly unlikely that the boom in corporate profits - driven in large part by cost cutting and low wage increases - can continue for much longer. A crash or major correction? Perhaps, perhaps not. But a prolonged bear market? All too possible.