| BUSINESSWEEK ONLINE : APRIL 26, 1999 ISSUE | ||||||||
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| BUSINESS OUTLOOK
Britain: Recession Fears Are Fading For seven months British interest rates have been a one-way street--south. Given the Apr. 8 quarter-point cut, the Monetary Policy Committee of the Bank of England has cut its benchmark rate six times since September, from 7.5% to 5.25% (chart). But now, given growing signs that the economy's weakness is bottoming out, the end of the MPC's rate-cutting is coming into sight. Several indicators are sending upbeat signals that prior rate-cutting is beginning to take effect. Most important, manufacturing output, hit hard by past strength in the pound and weak foreign demand, appears to be stabilizing, based on data through February. March survey data from the nation's purchasing managers show renewed strength in the service sector and construction. Also in March, house prices strengthened, as did auto sales, and British retailers said that buying was the strongest in nearly a year. The economy barely grew in the fourth quarter, and first-quarter growth will look sluggish as well, but fears of an outright recession are fading, and chances for a much-hoped-for soft landing are rising. Many analysts are upping their forecasts closer to the government's 1999 projection of 1% to 1.5% growth, which had been roundly criticized for being overly optimistic. Most analysts believe that low inflation will give the MPC room for one more quarter-point cut, to 5%. Underlying inflation in February dipped to 2.4%, below the MPC's 2.5% target, and it could remain below its target for the rest of the year. Wage growth has slowed sharply in recent months, as many companies have cut costs amid a squeeze on profits, and profitability will not return quickly. Also, underlying service inflation has turned down. Moreover, the Apr. 8 cut came only hours before a surprisingly large half-point rate cut by the European Central Bank, which took its policy rate to 2.5%. That action left a wide gap between rates in Britain and the 11-nation euro zone, giving the MPC additional leeway for another rate cut of its own. BY JAMES C. COOPER & KATHLEEN MADIGAN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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