Strong growth not enough to force rates rise

The economy's pace of growth picked up to the fastest for more than two years in the final quarter of 1996. But the fact that it was no stronger than expected led City experts to predict interest rates would not rise this side of the general election.

The service industries set the pace, with growth in business and financial services revisiting late-1980s rates. Construction also picked up significantly, while industrial output grew at a similar rate to the third quarter and agricultural output fell.

Analysts concluded that this was not buoyant enough to force Kenneth Clarke to accept Bank of England advice to increase the cost of borrowing. Eddie George, Governor of the Bank of England, is expected to repeat this advice at the monthly monetary meeting next week - a week ahead of the Bank's quarterly Inflation Report.

"The Chancellor and the Governor are both in an entrenched position," said Geoffrey Dicks, an economist at NatWest Markets. "But Mr Clarke has got more on his plate than worrying about the inflation rate at the back end of 1998."

Gross domestic product (GDP) increased by 0.8 per cent in the final quarter of last year, taking it to a level 2.5 per cent higher than a year earlier. Excluding North Sea oil, the quarterly rise was 0.7 per cent.

GDP in 1996 as a whole was 2.3 per cent higher than the previous year.

"Throughout the length and breadth of the country households are enjoying the benefits of healthy economic growth," Mr Clarke said, commenting on the figures.

Speaking on BBC television on Sunday, the Chancellor played down suggestions of disagreements between himself and Mr George. "I'm not going around thinking I'm infallible. The differences between us have not been enormous," he said.

Details of the breakdown of growth are sketchy at this preliminary stage, but the Office for National Statistics (ONS) indicated that growth was strongest in the service industries. There total output was up 0.9 per cent, reaching a level 3.4 per cent higher than a year earlier. Growth in business and financial services was at the upper end of their recent range of 1-2 per cent a quarter, making it similar to the pace set in 1988.

Within finance, the strength was concentrated in banking. Within business services, computer services and areas such as law, accountancy and management consultancy were the most buoyant.

The construction industry expanded by significantly more in the fourth quarter than it had in the third, according to the ONS. Although the gains were spread across sectors, housebuilding was especially strong.

The statisticians estimated that manufacturing and industrial output had grown by about as much in the October-December quarter as they had in September to November. Figures published for that period show growth of 0.6 per cent and 0.4 per cent respectively.

Many City economists reckoned yesterday's figures, combined with signs of weakness in manufacturing due to the strong pound, meant Mr Clarke would be right to postpone a rise in interest rates. Others say the recovery is gaining strength and could trigger higher inflation unless the cost of borrowing rises. "With economic growth set to accelerate further during the course of the year, we expect interest rates to rise significantly in 1997,'' said James Barty, UK economist at Deutsche Morgan Grenfell.

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