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Friday, October 22, 1999 Published at 09:11 GMT 10:11 UK

Business: The Economy

UK growth surge

Growth in the UK has been accelerating at a dangerous rate

The UK economy grew by 0.9% in the third quarter of 1999, according to the latest gross domestic product figures (GDP) from the Office for National Statistics (ONS).

The figures mean the UK economy is now growing at its fastest rate for two years.

[ image: The booming service sector is fuelling growth]
The booming service sector is fuelling growth
Analysts say the data could sway the Bank of England's Monetary Policy Committee (MPC) towards another interest rate rise.

If growth is felt to be too fast, the MPC will be quick to act to cool any build up of inflationary pressures, recommending another increase in the Bank's base rate.

The ONS preliminary figures put GDP up 1.8% year on year. Analysts had expected quarterly growth of 0.8% in the July-August-September period, and annual growth of 1.7%.

The service sector, the main motor of economic growth in Britain in recent years, was particularly buoyant, rising by 1.0% on the quarter and 2.6% on the year.

Within the sector, retail and catering activities were up, while communications and computing performed particuarly strongly.

Growth in the production and construction industries was estimated to have been similar to that in the previous three months. Both were up 0.6% quarter on quarter.

The UK economy has now expanded for 29 quarters in a row, dating back to 1992. Since then, GDP has risen 22.3%, with services up 28.9%.

Inflation fears

Inflation excluding mortgage interest payments is currently 2.1% - safely below the Bank of England's target of 2.5%.

One of the leading "doves" on the MPC, DeAnne Julius, who has strong links to industry, has argued that structural changes in the economy may have permanently reduced inflation.

She said that stronger international competition, new technology and greater price transparency were key supply-side changes that would exert downward pressure on UK inflation, at least over the medium term.

But although the MPC unanimously rejected an interest rate rise last month, other members are known to be worried about the booming housing market and the rate of wage inflation.

"The problem for the MPC is that while the economy is strong, inflation is weak and there is great uncertainty about the linkages between the two," said Andrew Milligan of Morley Fund Management.

Good for the government

Apart from the implications for interest rates, the strong economic growth will benefit the government as well as consumers and the unemployed.

It will vindicate Gordon Brown's forecast, made last year, that economic growth would pick up.

It means that tax revenues are rising ahead of expectations, giving the chancellor a possible surplus in the public accounts of as much as £10bn by the end of the financial year in April.

Although he is committed to a policy of "prudence", that could give him scope to be more generous in the next public spending round, and more scope for tax cuts in the March Budget.

But with growth in Europe's largest economy, Germany, still sluggish, it could lead to a greater divergence, rather than convergence, of the two economies - pushing any possible plan for membership of the euro further back.

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