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Wednesday, April 14, 1999 Published at 17:03 GMT 18:03 UK

Business: The Economy

Green shoots of UK recovery

The service sector is propelling the economy along

The UK economy appears to have escaped a recession, with many economists and business leaders now forecasting a spring recovery.

The mood is in sharp contrast to the period just before Christmas, when gloomy retail sales and a sharp decline in manufacturing exports led to fears that the UK economy would contract sharply in 1999.

[ image: The Bank has cut interest rates substantially]
The Bank has cut interest rates substantially
If sustained, it will be welcome news for the government, which has framed its plans on the belief that the economy will recover in the second half of the year.

As with all economic forecasts, there are still major unknowns before economists will be able to say with certainty that the economy has turned a corner, after registering near-zero growth in the last quarter of 1998.

But when GDP (gross domestic product) for the first quarter of 1999 is published next week, most economists expect growth to stay positive. A recession is defined as two quarters of negative growth.

Green shoots of recovery

"Spring has brought with it tentative signs of an economic recovery, particularly in the retail and service side of the economy," said Ian Fletcher, chief economist at the British Chambers of Commerce (BCC).

Their own survey, which will be published on Thursday, is expected to show a strong boost to business confidence compared to the previous quarter.

And other surveys, including those by the Confederation of British Industry (CBI) and the Chartered Institute of Purchasing and Supply (CIPS), have also suggested that business confidence has recovered, especially in the service sector.

Although other indicators, such as unemployment, are starting to move up, business confidence is considered one of the better predictors of the future course of the economy.

"The lead indicators are stronger rather than weaker and it may be that we don't get a single quarter of negative growth this year as many had feared," said Robert Barrie of Credit Suisse First Boston.

Forecasts revised up

A number of economic forecasters are now revising their numbers upwards for 1999, encouraged both by renewed business confidence and signs of a revival in consumer confidence and retail sales.

The HSBC Markets team has revised its growth forecast for 1999 from 0.5% to 1.0%, which corresponds to the government's own estimate.

And the Treasury's survey of independent forecasts, which was published on Wednesday, shows that the average of all forecasts is now 0.7% for 1999, and a robust 2.0% for 2000, substantially less gloomy than a few months ago, although still below the government's forecast of 2.25%.

"As we move into the second quarter, it seems likely that forecasts for growth will be revised seems probable that the greater part of the impact of lower borrowing rates on consumer spending will not come through until the second half of 1999," said Richard Jeffrey, economist at Charterhouse Securities Limited.

Confirming the trend, a Gallup poll of UK fund managers carried out for investment bank Merrill Lynch confirmed that 83% expected the economy to strengthen over the year, with an average growth rate of 1.1%

"The UK U-turn has been astounding. All talk of recession is gone," said Trevor Greetham, global strategist at Merrill Lynch.

Rate cuts

Three factors seem to have prevented the UK economy falling into recession.

First, the impact of the global economic crisis has been less than expected, especially for the major industrial countries, and certain key markets like the United States have continued to boom.

Secondly, the UK is less dependent on manufacturing, and manufacturing exports, than other countries like Japan and Germany.

Its manufacturing sector makes up only one-quarter of the economy, as compared to one-third in those countries. The service sector, which makes up 75% of the economy and is more insulated from international pressures, has proved remarkably robust.

And thirdly, the newly independent Bank of England responded rapidly to the threat of recession with a series of interest rate cuts, bringing down the cost of borrowing from 7.5% to 5.25%.

Their swift response appears to have reassured businesses and consumers and stimulated retail sales and investment.

"All measures of consumer confidence have rebounded over the last few months, with most of the damage done in the latter part of 1998 now reversed. More importantly, households' balance sheets are healthy and consumers look well-placed to respond to lower base rates, " said Jonathan Loynes, economist at HSBC.

Unlike the United States, neither consumers nor businesses have borrowed heavily to finance a consumer boom, leaving the UK better placed for a sustained recovery.

In addition, the public finances have remained solid, due to the tight squeeze on public spending maintained by the Labour government in its first two years in office.

All this has meant that the Chancellor has remained lucky as well as clever.

If the economy does recover, it will be able to claim credit for ending the cycle of boom-bust, paving the way for a more pro-European stance and an expansion of his attack on poverty.

But as we have already seen, a year is a long time in economics.

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Confederation of British Industry

British Chambers of Commerce

Chartered Institute of Purchasing and Supply

HM Treasury: Forecasts for the UK Economy

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