Pace of economic growth 'truly worrying'

The pace of economic growth is significantly faster than official figures suggest, according to new City research due to be published this week. Correcting for the fact that the first estimates of national income during an economic upswing are subsequently revised up suggests the actual growth rate is "truly worrying".

The research, by economist Michael Dicks at investment bank Lehman Brothers, points out that figures published by government statisticians at the time showed the economy growing at around its trend rate during the late 1980s boom.

In fact, the early-1986 estimates pointed to a slowdown, in what the then chancellor Nigel Lawson has since described as a "false dusk".

This pattern of underestimating growth continued throughout the boom, Mr Dicks said. "Interestingly, at the beginning of this year, the 1990s recovery looks to have reached the foothills of a real boom, if the 1980s experience is anything to go by."

He said a late-1990s boom was unlikely to be on the same scale as the last decade's, mainly because of the strong pound and the more efficient jobs market. These mean that inflationary pressures from both import prices and pay rises are likely to stay more subdued.

However, the probability that the economy is already growing at a rate well above its long-term potential means there is a real risk of inflation pressures.

Official statisticians have investigated the reasons for their tendency to underestimate growth in the late 1980s and reckon the bias has been eliminated.

But Mr Dicks argues that if initial estimates of Gross Domestic Product are compared with those made six months and three years later, there is strong evidence that this key measure of economic growth is very often revised up. The size of the revisions is greater when the economy is expanding rapidly.

The initial Office for National Statistics figure for growth in 1994 was 3.4 per cent, which it has revised up to 4.2 per cent. A final figure of 4.6 per cent is likely, according to the Lehman Brothers report, while 1995's initial 2 per cent figure could turn out as high as 3 per cent, and 1996's official 2.6 per cent within-year growth will turn out to be 3.2 per cent or more.