Newspaper article The Evening Standard (London, England)

Brown-Darling Power Struggle Casts a Shadow; ECONOMIC ANALYSIS

Newspaper article The Evening Standard (London, England)

Brown-Darling Power Struggle Casts a Shadow; ECONOMIC ANALYSIS

Article excerpt

Byline: Hugo Duncan

THE one glimmer of hope to emerge during the latest "worst week" for Gordon Brown and the Labour Government is a sign that the economy is staging something of a fightback. It looks increasingly likely that output in the UK will start to grow again in the third or fourth quarter of this year -- as predicted by Alistair Darling in the Budget in April.

What a shame then for the Chancellor that this first bit of economic news that could be described as "good" rather than simply "not as bad" came as his boss was desperately trying to force him out of his job.

A key survey showed a return to growth in May after more than a year of recession just as the Prime Minister was trying, and failing, to parachute his old ally Ed Balls into the Treasury in Darling's place.

The all-sector purchasing managers' index (PMI) rose to 50.4 -- the first time since March last year it was above the 50 cut-off between boom and bust. It was seen as something of a watershed in the City, a sign that things are actually improving rather than just getting worse more slowly, although political wrangling seemed to be of more interest than economic recovery to those around the Prime Minister.

Mortgage lending, house prices and consumer confidence have also shown signs of life and the FTSE 100 index has rallied hard since its low of 3512 in March.

The improving outlook has prompted a host of upgrades to growth forecasts in the City, including from the usually bearish Capital Economics today, as shown in the graph above.

They, like many others, expect a return to growth in the third quarter of this year after five quarters of decline since the second quarter last year.

But, as forecasters at Capital Economics acknowledge, the recovery is likely to be sluggish and could be short-lived. Caution is required, and for every positive, there is a negative to counter it, not least because the level of activity looks set to remain low for some time.

Take the PMI figures. Much of the improvement came as firms that drastically cut output over the winter restarted production to replenish nowdepleted stock levels rather than because of growing demand.

Mortgage lending is still too low to support a proper recovery in house prices, and further falls look certain, while consumer confidence will remain fragile for as long as unemployment is rising and businesses are going bust. …

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