Is the British economy slowing down enough to quell the policy rift between Chancellor of the Exchequer Kenneth Clarke and Bank of England Governor Eddie George? Their May and June meetings went the same way: George asked for a rate hike, and Clarke said no.
At the July 27 confab, Clarke came armed with a load of fresh data showing a cooler economy. Real gross domestic product rose at a quarterly rate of 0.6% in the second quarter, down from 0.7% in the first, and growth over the past three quarters has slowed sharply (chart). The slowdown mainly reflects weaker domestic demand, resulting from three interest-rate hikes since last September and higher taxes.
Most recently, the Confederation of British Industry's quarterly survey shows weaker growth in the factory sector. It says output is rising at the slowest rate since April, 1994, and orders are waning along with business confidence. Moreover, the Association of British Chambers of Commerce say the slowdown is spreading to the service sector.
The data are now so convincing that George may have to back down from his rate-hike request. But unless the BOE sharply alters its inflation outlook, the bottom line for George is that underlying inflation, excluding mortgages, stood at 2.8% in June and has exceeded the government's goal of 2.5% all year. Most private economists expect it to rise, remaining above 3% in 1996.
With the Tory leadership weakened, Clarke seems inclined toward a looser policy mix. The government has all but promised a tax cut before the next election, to be held by May, 1997. For Clarke, the slowdown could be a mixed blessing: It lets him deflect calls for higher rates, but if it reduces revenues, a tax cut could bust his budget goals. Even if there is room for a tax cut, George has suggested that a looser fiscal policy will have to be offset by a tighter monetary stance. So even as the economy slows, the policy rift could take a new turn when the next budget is unveiled in November.