In Britain, Fast Growth...And Inflation Fears

Britain ended 1994 with a bigger-than-expected bang. And this year looks as if growth will continue but at a slower pace, if the Bank of England has its way.

Britain's real gross domestic product grew at a strong 3.1% annual rate in the fourth quarter. For the year, the economy expanded by 4%--the biggest annual gain in six years. The job market also showed signs of momentum as the year ended. In December, unemployment fell by 54,600--the largest monthly drop in six years. The jobless rate slipped from 8.8% to a three-year low of 8.6%.

Looking ahead, manufacturers expect 1995 to bring further growth but higher prices. The Confederation of British Industry's Jan. 24 survey shows that business optimism rose in January, helped by expectations of stable output growth and strong export orders. However, the CBI also found that 41% of companies plan to raise prices within the next four months, while only 8% expect to lower prices. The net reading of 33% is the highest in five years (chart). Businesses reported higher unit-production costs and tighter capacity use.

These price pressures are raising worries about rapid inflation--long a scourge to Britain's economy. As a result, the Bank of England will continue to tighten monetary policy. The BOE has hiked interest rates twice since September, and the strong GDP and CBI reports raise the odds for another boost soon.

The government is also pursuing restraint on the fiscal side. Higher excise taxes on tobacco and alcohol kicked in on Jan. 1, and extra social security payments, scheduled for April, have been tabled. Both measures will cut into household disposable income.

The BOE's goal is to slow the economy, not strangle it. By raising rates now, while inflation is a modest 2.9%, the central bank hopes to keep Britain's economy growing, but at a slow enough pace to avoid the capacity and labor constraints that have historically pushed inflation to double-digit levels. In the BOE's view, less is sometimes more.

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