UK and US growth too hot to handle

UK and US growth too hot to handle

Interest rates look certain to rise on both sides of the Atlantic after new data showed yesterday that the US and the UK are both enjoying robust growth.

The UK economy grew by 0.8% in the final quarter of 1999, bringing the annual rate up to 2.7%, its strongest for nearly two years, according to figures published yesterday by the Office for National Statistics.

But, with output growth moderating - the Q4 increase was the same as that recorded in the previous quarter - there are signs that the increases in the cost of borrowing since last September are starting to bite.

"There is little doubt in our minds that further base rate rises are in the pipeline," said Philip Shaw at Investec Research. "But the pace is sufficiently moderate to limit the peak in base rates to 6.5% this year."

The Bank of England's monetary policy committee is next due to meet in early February.

The ONS said the economy expanded by 1.9% in 1999, a fraction above the Treasury's forecasts and well ahead of most private sector economists' predictions.

Growth in the US continued at a blistering pace in the last three months of 1999, according to the US Commerce Department. A consumer shopping spree helped propel the annual rate of growth in the fourth quarter up to 5.8%, the strongest reading for a year.

"Financial markets are telling us that the US economy is getting too hot to handle," said John Lonski, chief economist at Moody's Investor Service. Most.....continued below

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economists expect the US Federal Reserve to increase interest rates at its meeting next week, particularly as official data showed an unexpectedly sharp jump in wage inflation last month.

Last week Alan Greenspan, chairman of the Federal Reserve, promised that it would not call a halt to the US economy's record run of growth. February will mark the 107th successive month of expansion, surpassing the 106 month record set in 1969.

The UK expansion which began in the second quarter of 1992, a year and half after the start of the US recovery, broke all previous records for uninterrupted growth back in 1997. The recovery has been going for 30 quarters now, marred only by a quarter of stagnant growth at the end of 1998.

The ONS said industrial production grew at a slightly slower rate in the last quarter of 1999, after recording a 1.2% increase the previous quarter. The services sector expanded by 0.9% in fourth quarter.

"In terms of the various sectors, the economy is now looking better balanced than at any point since the outbreak of the Asian crisis two and half years ago," said Mr Shaw.

Computing services was one area which the ONS said was in recession. The millennium date change, which had been the motor behind demand for IT consultants for most of the year, saw other activity slow down. The millennium also prompted a credit card spending spree, according to separate figures from the British Bankers' Association.

"There was a heavy emphasis on credit card borrowing at the expense of personal loans," said Tim Sweeney, director general of the BBA. "Only time will tell if this borrowing was temporary and planned or whether people over-extended themselves amid the Christmas and millennium celebrations or in the high street sales."

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