BUSINESSWEEK ONLINE : JULY 17, 2000 ISSUE
BUSINESS OUTLOOK Britain: Tightening Starts to Pay Off The Bank of England's tightening policy is finally showing teeth, and the moves are nipping at Britain's solid economic growth. Real gross domestic product grew just 0.5% in the first quarter from the fourth. Overall domestic demand was especially weak, up 0.2%, the smallest quarterly rise in three years (chart). Household expenditures rose 0.6%, but business investment and government outlays actually fell. Inventory accumulation added to GDP growth, but the buildup may have been unintentional since it was concentrated in retailing and wholesale, the same industries hit by weaker demand. The first quarter also saw the British current account balance in deficit again. Slower export growth, thanks to past strength in sterling, and less income from overseas investment, are hurting Britain's foreign trade position. The weak first-quarter data strengthen the notion that the BOE is nearly done with its tightening actions. The central bank has hiked its repurchase rate, currently at 6%, four times since September. The urgency to lift rates has also eased since the Federal Reserve held its policy rate steady in June, keeping the gap between Britain and U.S. rates the same. Even so, policymakers remain concerned about some cost and price pressures building in the economy. Wages, a top priority for the BOE, were up a strong 6.3% in the first quarter from a year ago. And April consumer credit posted a record increase. Consumer inflation remains on the high side because of energy prices. Total prices rose 3.1% in the year ended in May. Underlying inflation, which excludes mortgage interest and some taxes, was 1.7%, at the upper limit of the BOE's target range. Inflation will be pushed higher by the recent weakening in the sterling, which may cause import prices to rise. All this means that while the BOE is probably done for now, it will remain on the watch. The bank will move if the economy re-accelerates or if the past strength causes price pressures to rise to dangerous levels. By JAMES C. COOPER & KATHLEEN MADIGAN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Britain: Tightening Starts to Pay Off CHART: British Spending Slows Dramatically INTERACT E-Mail to Business Week Online

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