Outlook: Jumping the gun

THE DECLINE in the pound in recent days takes the exchange rate back to around its level when the Monetary Policy Committee met in May, and reverses the increase given as one of the explanations in the minutes for the June interest rate cut. That does not mean the committee will raise interest rates today. On the contrary, there was some idle speculation in the financial markets yesterday that it could spring another surprise reduction. The key to the puzzle lies in the outlook for growth in the UK.

Only Japan amongst the other major economies is likely to grow more slowly than the UK this year. The Chancellor will still need a chunky pick-up in activity in the second half of the year to hit his target of 1 per cent growth, even though it is clear that the downturn is past its worst.

The growing perception that Britain is booming again needs some explanation, given this background. One reason is certainly that it is booming in parts. The housing market has its hot spots and some industries, like telecoms and IT, have more business than they can cope with. In London, which is where economic commentators tend to live, the restaurants are packed and the shopfronts are plastered with "help wanted" signs.

But the industrial areas of the country reflect the woes of manufacturing under the yoke of the strong pound. Construction is buoyant again but agriculture is suffering. As ever, the structural weak links limit the performance of the British economy. It is this more sober assessment of the economy that underlies the ripple of currency market sentiment in favour of yet lower interest rates. The money markets have almost certainly been pricing in a bigger increase in interest rates next year than is likely, given the outlook for growth and inflation. This means there is every reason to expect the decline in sterling to continue.