Britain: Time May Become Blair's Worst Enemy

Prime Minister Tony Blair and his Labour Party government head toward the national election, now expected on June 7, riding atop a healthy economy. But downside risks are gathering.

The Bank of England's Monetary Policy Committee listed three of them as reasons for its Apr. 5 rate cut: the U.S.-led global slowdown, the plunge in British stock prices, and the short-term impacts of foot-and- mouth disease. The committee trimmed a quarter-point from the base lending rate, now at 5.5%, the second such reduction this year, and suggested that it is leaning toward further cuts.

For now, the economy is strong, amid tight job markets, buoyant consumer spending, and a vibrant service sector. Plus, mortgage rates are down to their lowest levels since 1965. The job markets are one of Blair's chief assets. Based on those claiming jobless benefits, unemployment is below 1 million, a key political mark, and the March jobless rate, at 3.3%, is at a 26-year low.

However, signs of slowing are showing up, even as February wage growth spiked up. The U.S. takes about 15% of British exports, and a March survey revealed weaker factory orders and output. Factory production rose a scant 0.1% in February after dropping 0.8% in January. Other March surveys by trade groups show a slowdown in retail sales and a cooler climate in the service sector. All this is not to mention this year's drop of some 10% in the stock prices of the 100 largest British companies.

Moreover, the impact of foot-and-mouth disease has yet to hit the data. Estimates of the economic cost of the outbreak run as high as $13 billion, some 0.4% of gross domestic product. Most of the hit will be on tourism, about 7% of GDP, which could lose some $7 billion in revenues by September, based on one projection.

Blair has already delayed local elections from May 3 to concentrate on the outbreak. Conservatives in Parliament are hoping for a further delay until autumn, when economic prospects may not be so clearly on Blair's side.

By James C. Cooper & Kathleen Madigan

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