| BUSINESSWEEK ONLINE : AUGUST 16, 1999 ISSUE | ||||||||
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| BUSINESS OUTLOOK
Britain: These Were the Kindest Cuts of All Three cheers for the Bank of England. Its Monetary Policy Committee has steered the economy away from recession via interest-rate cuts totaling 2.5 percentage points since October. Now, with the policy rate at a 22-year low of 5% and the economy rebounding strongly, the MPC may have to start plotting a course for higher rates, even though inflation is falling and British rates are twice those in the euro zone. The recovery is clear from the broad pickup in second-quarter gross domestic product, which rose 0.5% from the first quarter, or 1.8% at an annual rate, after near-stagnation in the two previous quarters. Growth from a year ago is now 1.2%, boosted a bit by revisions to domestic demand in previous quarters. Services, up 0.5% in the quarter, continued to lead growth. Construction also rose, and manufacturing, previously beset by sagging exports and the pound's 22% gain since 1996, posted its first advance in a year, despite the sterling's continued strength. Even with the recent malaise, domestic demand has remained strong. Consumers are spending freely, with the jobless rate at a 19-year low of 4.5%, and housing demand has taken off. Also, the Confederation of British Industry's July survey shows business confidence at the highest level in 1 1/2 years (chart). Given the stimulus to domestic demand from past rate-cutting, as well as from stronger exports, growth seems likely to accelerate, eventually putting upward pressure on wages and prices. Underlying retail inflation is only 2.2%, below the MPC's 2.5% target, and it may dip lower. However, the economy is recovering at a relatively high level of labor and capacity utilization, especially in the large service sector. Economists generally expect inflation to pick up again by early next year, as imported deflation runs its course. Depending on the recovery's strength, the MPC may see the need for some preemptive tightening before the end of the year. Utilization rates and wage growth are likely to be key areas of focus for the MPC in the months ahead. BY JAMES C. COOPER & KATHLEEN MADIGAN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS Britain: These Were the Kindest Cuts of All CHART: British Industry Foresees Better Times INTERACT E-Mail to Business Week Online | |||
