Hopes undimmed by standstill on interest rates

PAUL WALLACE

Economics Editor

Kenneth Clarke and Eddie George left interest rates unchanged at their monthly monetary meeting yesterday, but hopes of an early reduction were undimmed as the fall in unemployment tapered off in December, vacancies fell and the growth in underlying earnings remained unchanged at 3.25 per cent.

A surprisingly large fall in the German repo rate from 3.73 to 3.65 per cent helped interest rate sentiment, but the latest figure for the public sector borrowing requirement raised concern that the Government could overshoot its forecast for 1995/6, even though this was raised by pounds 7.5bn at the time of the Budget.

Following Mr Heseltine's gaffe on Tuesday in revealing that unemployment had fallen in December, the only question was by how much. The answer was 7,900, about half the average monthly fall in 1995 and a quarter of the rate of reduction in 1994.

Although statisticians cautioned that special factors might have made the fall in claimant unemployment smaller than the underlying trend of 10,000-15,000, a drop in the stock of vacancies at Jobcentres also pointed to a less buoyant labour market.

Notification of new vacancies and placings fell more sharply than at any time since June 1991, albeit from near-record levels.

The index of average weekly hours worked in manufacturing fell in November to its lowest level since February.

The Treasury drew satisfaction from the continuing subdued growth in underlying earnings for the whole economy, suggesting that this augured well for inflation.

However, there was a pick-up in the services sector from a low of 2.5 per cent over the summer to 2.75 per cent in October and November.

The City largely shrugged off disappointing news on unit labour costs in manufacturing, which jumped to 4 per cent in the three months ending November compared with a year ago, the highest for four years. About 4,000 extra manufacturing jobs contributed to a fall in productivity of 0.1 per cent, the first since March 1986.

Simon Briscoe, UK economist at Nikko Europe, said: "We do not see this as the start of a worrying trend." It reflected the sharpness of the slowdown in output growth and would correct itself in 1996 as output roseor jobs were cut.

Fears of an overshoot on the PSBR were raised by figures showing the Government borrowed marginally more in the first nine months of the financial year than in the same period in 1994/5. The cumulative total rose to pounds 23.9bn, compared with pounds 23.8bn in 1994/5.

Andrew Smith, shadow chief secretary, said the figures confirmed the concerns of the Treasury Select Committee, which had expressed disappointment at the slippage in the PSBR.

"The deficit looks on course to overshoot the Treasury's full-year forecast of pounds 29bn," said Alex Garrard, UK economist at UBS, a view shared by economists at Hoare Govett and NatWest Markets. While net departmental outlays remained under control, overall receipts in the first nine months of the year have risen by half a per cent less than the Treasury's forecast for the full year.

A further black spot is that local authorities have borrowed pounds 900m so far this year compared with a net repayment of pounds 800m in the same period for 1994/5.