For the first time in more than a decade the question is being asked whether the growth of the UK economy this year may be, in some sense, too rapid. Fears have been expressed of ‘overheating’ leading to a rise in inflation and excessive growth in imports. Comparisons have been made with the ‘boom’ conditions of 1972 and 1973. In our view these fears are exaggerated and the comparisons misleading. Nevertheless some increase in the rate of inflation is to be expected, and the underlying position on the current account of the balance of payments seems already to have moved from surplus into deficit. We now expect the rate of the economy this year to be around 3½ per cent, compared with about 3 per cent in 1986. Thus, if we are correct, the acceleration year on year is very slight, well within the error margins of measurement. This contrasts with 1972 and 1973 when the growth rate averaged 4½ per cent for two years. Moreover unemployment was only about 1 million at the beginning of 1972 and about 1/2 million at the end of 1973 whilst last year it at over 3 million and is not expected to fall as low as 2½ million even next year. Even if inflation next year does rise from about 3½ per cent a year to about 5 per cent, as we expect, this is still not comparable with the rates of 7½ and 9 per cent experienced in 1972 and 1973. The CBI index of capacity utilisation is now not far below its peak level in 1973, but we doubt whether an index of this kind is reliable for comparision between periods so far apart in time.
Implications of the U.S. Current Account Deficit
