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To: PaulM who wrote (13769)	6/24/1998 8:44:00 PM
From: goldsnow	Respond to of 116815

Wednesday 24 June 1998 Issue 1125 Spend, spend Britain sinks œ3.2bn in red By Anne Segall, Economics Correspondent, and George Jones, Political Edi BRITAIN's balance of payments plunged into the red in the first three months of this year, increasing the prospect of the Bank of England raising interest rates next month to cool soaring consumer demand. A rush to buy foreign holidays and cheap imports as consumers dipped into their savings contributed to the worst set of figures since the recession year of 1992. The swing from a position of small surplus to a deficit of œ3.2 billion brought comparisons with the early 1990s when rampant consumer demand forced a sharp tightening of policy and eventual recession. Yesterday's figures brought to an end a period of surpluses lasting a year and a half and prompted warnings from Opposition politicians and the City of a "hard landing" for the economy. They claimed that "two economies" were developing in Britain - a booming domestic and service sector while the manufacturing and export sector faced cutbacks in orders and recession. Government statisticans pinned much of the blame for the bad figures on an unusually large œ2.1 billion transfer to the European Union - apparently to meet a call for funds for the Common Agricultural Policy. They nevertheless conceded that the underlying position on the balance of payments has deteriorated. A key feature was the surge in the travel deficit to œ1.7 billion, the highest on record. The high pound is encouraging people to take advantage of good exchange rates and holiday abroad. The deficit on trade also widened by œ500 million as exports fell and imports rose while earnings from Britain's stock of overseas assets declined by œ600 million. The climb in the value of the pound over the past year has made foreign goods seductively cheap and made consumers feel better off in addition to the direct boost from higher earnings and rising levels of employment. The economy came close to overheating in the first quarter as consumers used their savings to finance higher levels of spending while business investment raced ahead. Government statisticians estimate that consumer spending rose by 0.9 per cent in the quarter to a level 4.9 per cent above that of a year earlier. Spending on consumer durables, including cars, showed annual growth of 13.4 per cent. These figures are likely to cause concern at the Bank of England. Eddie George, its Governor, has warned about the urgent need for a slowdown in domestic demand. They show that far from easing, demand pressures in the economy are as strong as ever, with spending across all sectors rising by 1.3 per cent in the first three months of the year, faster than at any time since the second quarter of last year. The Bank's monetary policy committee meets again on July 8 and 9 and could raise interest rates by half a point, some economists said. Earlier this month, the Bank raised interest rates by an unexpected .25 point to 7.5 per cent - the highest level since the aftermath of "Black Wednesday" in 1992. The worry for policy-makers is that parts of the economy - notably manufacturing - are already in recession and are having a depressing impact on overall growth. Yesterday, the Paris-based Organisation for Economic Co-operation and Development said that a further rise in interest rates would risk tipping the whole economy into recession. Francis Maude, the Conservative Treasury spokesman, claimed that the balance of payments figures showed "another wheel coming off the wagon". He said: "They are further evidence that Gordon Brown is squandering the golden economic legacy he inherited from the Conservatives." With the exchange rate again rising to around three Deutschmarks to the pound, he claimed exporters were being driven into the ground. "Gordon Brown has created boom and bust at the same time," he said. The Liberal Democrats said that if Mr Brown had taxed consumers rather than businesses in his first two Budgets, he might have avoided "higher inflation, higher interest rates and the higher pound". Simon Briscoe, United Kingdom economist for Nikko Europe, said the reappearance of a balance of payments deficit was probably the most dramatic sign of the damage being wrought by the strong pound. He argued that the decline in the economy's growth rate was enough to justify leaving interest rates on hold, but said the monetary policy committee might raise them in the face of the rise in earnings growth and the threat of weaker sterling as the current account deficit widened.