Overall growth of 2.7%; retail prices higher by 2.5%; a 1.5% increase in investment in private housing; and a 2.6% rise in household spending. Such are the prospects for 2001, according to economic forecasters at the Confederation of British Industry.

They assume that 2000 will have produced GDP growth of 3%; consumer price inflation of 3.1%; a 1.3% increase in the construction of private-sector homes; and a 3.5% rise in household spending. The modest slowdown which the new predictions indicate takes into account the chancellor’s pre-Budget package of measures. The CBI‘s chief economist Kate Barker says these are unlikely to put the government’s inflation target at risk.

A separate view on prospects for next year, published by Barclays in its latest Economic Review, argues that if oil prices do not rise much higher in the near term, and are on a downward path next year, ‘then the outlook remains very positive’.

Barclays notes that all the measures of UK inflation used by the Bank of England have now fallen to, or below, 2.5%. And although the downward trend of import prices has run its course, ‘the major underlying threat to the inflation target has diminished’.

The decline in domestically driven inflation reflects the return of labour productivity growth to its long-run average of around 2%, and a moderation in average earnings growth to around 4%. Together, these developments have reduced economy-wide growth in unit labour costs to less than 2%, from an average of over 3% in the past three years. And despite employment increasing by 800,000 over the past three years, average basic pay settlements have remained stable, falling to 3% in the private sector in the three months to September.

Together these factors suggest that the economy may not be facing the capacity limits which the Monetary Policy Committee of the Bank of England has believed. Hence the need for a cutback in private demand to provide resources for stronger government expenditure may not be as pressing as thought.

The latest official estimates of inflation suggest that manufacturers’ costs for fuel and materials fell by 1.2% in October, to a level 12.2% higher than a year earlier – down from an annual rate of 13.6% in September. Input costs for manufacturers of construction materials are rising by an average 3%, while those for suppliers of housebuilding materials were 2.7% higher in October this year than in October 1999.

Factory gate prices of manufactured products overall were 2.6% higher in October than a year ago, with prices of wood and wood products easing to an annual rate of just 0.1% in October from 0.2% the previous month and 0.4% two months before.

Inflation has also eased on the high street. The October all-items index stands 3.1% up on a year ago, compared with a 3.3% increase in the year to September. DIY materials are just 0.5% up on a year ago, while furniture is 0.6% more expensive.

But even though the need for a slowdown in consumer spending may be less than the Bank of England had earlier thought, there is strong evidence that business on the high street is weakening. The British Retail Consortium says that like-for-like sales increased by only 1.5% in the year to October, compared with a 2.9% increase in September.

On the international economy, world growth appears to have peaked in the first half of this year, but a substantial slowdown is not likely, according to the OECD. The main development expected next year is a modest downturn in the US, from more than 5% growth this year, to under 4% in 2001. Growth in Asia is forecast to moderate from 6.5% in 2000, to 6.1% next year. In contrast the European economy looks set to continue expanding at around 3%.

City analysts judge that the two main uncertainties for next year are the oil price, and imbalances in the US economy.
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