Recovery Position: The Bad News Is That Economic Growth in the First Quarter of 2002 Has Been Disappointing. the Good News, Argues David Ross, Is That This Means Interest Rates Need Not Rise Much This Year. (Economics)

By Ross, David | Financial Management (UK), June 2002 | Go to article overview

Recovery Position: The Bad News Is That Economic Growth in the First Quarter of 2002 Has Been Disappointing. the Good News, Argues David Ross, Is That This Means Interest Rates Need Not Rise Much This Year. (Economics)


Ross, David, Financial Management (UK)


Growth of only 0.1 per cent in the first quarter of 2002, after stagnation in the fourth quarter of last year, is disappointing--City economists had been forecasting growth of 0.4 per cent. In the first quarter the output of the production sector is estimated to have fallen sharply as a result of declines in all its major components--manufacturing, energy extraction and energy supply--while output of the service sector is reckoned to have been similar to the previous quarter at 0.5 per cent. The retail, computer services and post and telecoms industries all registered growth. The poor performance means that the economy expanded by only 1 per cent from a year earlier, the slowest annual growth since the end of 1992 (see graph).

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But it is too early to dismiss the chancellor's Budget forecast of 2-2.5 per cent growth this year, although it is slightly higher than the current consensus. In recent years, Gordon Brown's forecasts have proved to be more accurate than most of the City and non-City forecasts used to compile consensus forecasts.

This month's business surveys suggest that the short-term future is likely to be better than the recent past. The Purchasing Managers' Index, compiled by the Chartered Institute of Purchasing and Supply, rose to 53.4 in April from 50.6 in March, its highest since December 1999. Encouragingly, given the persistent strength of sterling, the new export orders index rose to 55.1 from 50.0 in March, its fastest expansion for more than five months. Other surveys, including one from the CBI, also point in the same positive direction.

Failure to meet the forecast is not only an academic issue, as half of a percentage point is equivalent to around 5 billion [pounds sterling] of national income. If growth is around 1.8 per cent, as Ernst & Young's Item Club currently forecasts, rather than the 2.25 per cent forecast by the chancellor, next year he will either have to borrow more or raise taxes to meet his spending targets. …

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Recovery Position: The Bad News Is That Economic Growth in the First Quarter of 2002 Has Been Disappointing. the Good News, Argues David Ross, Is That This Means Interest Rates Need Not Rise Much This Year. (Economics)
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