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Wednesday, August 18, 1999 Published at 18:27 GMT 19:27 UK


Business: The Economy

The 'new economy' - too good to be true?

Jobs are plentiful in the 'new economy'

Many analysts are now talking about a new paradigm in economics or the new economy - with low inflation, low unemployment and healthy economic growth. BBC economics reporter Chris Giles looks at the evidence.


[ image: Chris Giles]
Chris Giles
What do people mean when they talk about the new economy?

The term new economy has been coined to describe the fact that America and many other industrialised countries are enjoying a long phase of economic growth, low unemployment and no signs of inflation.

For those who believe in the new economy it's been achieved because computer technology and global competition has allowed companies to offer more for less money - in the process boosting economic growth with low inflation.

Have we heard this sort of talk before?

A term like "new economy" is something that comes around every time economic figures look very good. In 1994 there was talk, most of it admittedly coming from the then Chancellor, Ken Clarke, of a goldilocks economy - "not too hot and not too cold"!

And in the late 1980s all talk was on the "economic miracle" just before the recession of the early 1990s.

Is something different happening this time?

The UK has enjoyed good economic growth since 1992, unemployment has fallen below the trough seen in the 1980s boom and inflation, stable at 1.3%, is close to its lowest level for over 35 years.


[ image: Britain's industry is growing again, with little fear of inflation or wage pressures]
Britain's industry is growing again, with little fear of inflation or wage pressures
Any Government looking at current economic data in the last 30 years would envy the figures that now are a monthly event.

That's not to say there are no economic problems.

The north-south divide in terms of unemployment and prosperity has opened up again and neither manufacturing industry nor agriculture would think this is a time to be proclaiming an economic miracle.

On top of this is the rather uncomfortable fact that if you go back a bit further to the 1950s and early 1960s unemployment was lower and in most industrialised countries economic growth equally as quick.

Why are things looking so good?

Apart from the new economy idea, which shouldn't be dismissed there are a couple of more mundane reasons.


[ image: Some analysts say the Internet could be driving force of the new economy]
Some analysts say the Internet could be driving force of the new economy
Low inflation can be explained by a combination of temporary factors. The high pound has kept the price of imports down and a remarkable drop in world commodity prices in 1997 and 1998 helped reduce the raw material costs of industry.

This meant that the economy could grow and unemployment could fall without sparking inflation.

Another reason is economic policy has perhaps improved to the extent it is having a marked impression on our lives. Expectations of inflation have fallen which has helped bring down wage claims and become self-fulfilling.

Will the good times continue?

The only truthful answer to this is no one knows. Many of the ideas behind the "new economy" are a reaction to extremely good economic news. If this changes so will the theories.

Productivity, even in America has been growing very slowly in this economic cycle but if the very recent pick up continues, economies could grow further without inflation.

But there are signs of problems on the horizon. The recent doubling of oil prices mean the trough in commodity prices might be over, house prices rises might spark off a consumer boom when already the savings ration is at a 10 year low, and if the pound finally falls import prices would rise sharply.

And anyone who thinks the economy won't hit new constraints at some time in the future, perhaps skill shortages or wage inflation, is surely living in cloud cuckoo land.



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The Economy Contents

In this section

Inquiry into energy provider loyalty

Brown considers IMF job

Chinese imports boost US trade gap

No longer Liffe as we know it

The growing threat of internet fraud

House passes US budget

Online share dealing triples

Rate fears as sales soar

Brown's bulging war-chest

Oil reaches nine-year high

UK unemployment falls again

Trade talks deadlocked

US inflation still subdued

Insolvent firms to get breathing space

Bank considered bigger rate rise

UK pay rising 'too fast'

Utilities face tough regulation

CBI's new chief named

US stocks hit highs after rate rise

US Fed raises rates

UK inflation creeps up

Row over the national shopping basket

Military airspace to be cut

TUC warns against following US

World growth accelerates

Union merger put in doubt

Japan's tentative economic recovery

EU fraud costs millions

CBI choice 'could wreck industrial relations'

WTO hails China deal

US business eyes Chinese market

Red tape task force

Websites and widgets

Guru predicts web surge

Malaysia's economy: The Sinatra Principle

Shell secures Iranian oil deal

Irish boom draws the Welsh

China deal to boost economy

US dream scenario continues

Japan's billion dollar spending spree