Britain: Decent Growth--but Can It Last?

Amid the talk of global recession, Britain posted some upbeat news: Its third-quarter real gross domestic product surpassed expectations. But can a diligent central bank and healthy service sector keep Britain out of recession?

Britain's real GDP rose by 0.6% in the third quarter from the second, better than the 0.4% forecast by most analysts. Consumer purchases continued to lead growth, while the manufacturing sector remained in recession. Real GDP is now up 2.3% from a year ago, making it very likely that Britain will grow more than 2% for all of 2001. If so, the nation will lead all Group of Seven countries in economic growth for this year. Consumers should keep spending this quarter as job markets remain fairly tight.

But consumers are worried about the economy over the next year--and for good reason. First, some of the consumer-spending strength reflects gains in tourism. That sector's outlook is dimming because of jitters over air travel and some rise in the pound sterling. Second, the Confederation of British Industry's index of business confidence plunged, from a reading of -22 in the third quarter to -54 in the fourth (chart). Because of the slowdown in Europe and the U.S. recession, the index for export expectations fell to a 21-year low.

Pessimism is growing despite six interest-rate cuts by the Bank of England's Monetary Policy Committee, including quarter-point cuts on Sept. 18 and on Oct. 4. Analysts expect another quarter-point cut on Nov. 8.

For now, the BOE has decided to shift its concern toward the global economy and away from British inflation. Consumer prices increased just 1.7% in the year ended in September, and prices excluding mortgage interest were up only 2.3%. Governor Eddie George, however, has made it clear that, once the global downturn passes, the BOE will quickly return to inflation-fighting. That means the bank may be quite accommodative in the next few months, but it could reverse its policy course rapidly late in the first half of 2002.

By James C. Cooper & Kathleen Madigan

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