UK economic growth to slump in 1998, top forecasters warn

The UK economy is expected to slow dramatically in 1998 with interest rates likely to rise further from their current 7.25% level, leading commentators have predicted.

Two separate reports from Oxford Economic Forecasting and Cambridge Econometrics both predict a sharp fall in the growth of the economy over the next 12 months due to the high cost of borrowing, overvalued sterling and a tight fiscal policy.

While Cambridge Econometrics believes growth will fall to 2.5% next year and to 1.75% in 1999 from 3.5% in 1997, Oxford Economic Forecasting thinks economic growth will be reduced to 2.1% in 1998 and 2% in 1999.

The latter also believes one more interest rate increase is likely, although base rates are likely to fall back to 6.75% by the end of 1998 and to 6.25% by mid-1999.

However, the reports provide contradictory forecasts about the likely levels of consumer spending over the coming year.

"Prospects for consumer demand remain high," Oxford Economic Forecasting said.

"In particular, we expect a continuing impact from the £36bn of windfall pay-outs households received in 1997.

"We expect consumer spending to rise by 4% in 1998 after 4.5% in 1997 before easing to 2.25% in 1999."

But Cambridge Econometrics was more pessimistic about consumer spending, believing it would lose momentum because of higher interest rates and as the effects of building society windfalls comes to an end.

Oxford Econometrics also cautions that world share prices could crash in the coming months. A major collapse in prices worldwide would sent the UK stock market diving by about 25%, cutting growth by about 0.25% to 0.50%.

"At the moment, the Bank of England is clearly anxious to avoid the mistakes of 1987/88 when worries about the impact of the crash led policy makers to ignore the inflationary dangers posed by booming domestic demand," the report adds.

The Bank of England's Monetary Policy Committee which determines interest rates meets this week with an announcement about any change in the cost of borrowing at noon on Thursday.

Apparently disappointing Christmas sales in the high street, indicating a slowdown in the economy, will be one factor the committee will take on board in reaching its decision.