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Britain's Debate Over Growth Gets Noisier

International Business Outlook


Signs of a healthier recovery in Britain are evident in the second-quarter data. But those signals only heighten the growing--and quite public--tension between the Treasury and the Bank of England.

The latest monthly news certainly indicates that Britain's gross domestic product may grow faster for the rest of the year than its revised 2.6% annual rate in the first quarter. Price-adjusted retail sales grew a better-than-expected 0.4% in April to a record high (chart), despite the 8.9 billion tax increase that hit consumers that month. Even with higher taxes, a May Gallup poll found consumers feeling much better about their economic futures. That bodes well for increased consumer spending.

Two reasons for the rise in confidence are the better tone of Britain's labor markets and faster wage growth. The unemployment rate dropped from 9.7% in March to 9.5% in April--the lowest in two years. Average earnings were up 4% in the year ended in March, better than the 3.7% rate in February. And among wage packets settled in April, 48% called for pay hikes of 3% or more. That represents a sharp rise from January's 31% rate.

In light of the economy's stronger pace, the Bank of England has said further cuts in interest rates are not needed. True, inflation remains tepid. Retail prices rose 1.2% in April, or 2.6% over the past year. But that mostly reflected the loss of tax relief for mortgage interest payments. Excluding mortgage costs, the core rate fell to 2.3% in April, the lowest in 19 years of record-keeping.

The central bank, however, is looking forward. In its quarterly Inflation Report, the Bank estimated that there is a 6% gap between current output and potential GDP. Nonetheless, it said, wage hikes, as well as quicker money growth and high inflation expectations, will heat up price pressures.

The Bank's inflation fears are clashing with the government's desire for more growth. Chancellor of the Exchequer Kenneth Clarke and Bank of England Governor Eddie George are waging a public debate over interest rates, at the same time that the central bank is pushing for independence. And while the government may delay easing, the betting in the financial markets is that lower rates are on the way.JAMES C. COOPER AND KATHLEEN MADIGAN With Paula Dwyer in London

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