View from City Road: Lower rates will keep us on track

The Treasury seized on yesterday's gross domestic product figures as evidence that talk of the recovery 'faltering' has been overdone. Growth has indeed returned to around its trend level, but it is too soon to conclude that the economy is out of the woods.

The 0.6 per cent rise in national output between the second and third quarters means growth for the year as a whole is likely to be between 1.8 and 2 per cent. This is in line with the Treasury's May and October internal forecasts, but well ahead of its March Budget forecast of 1.25 per cent and the meagre predictions of economists at the beginning of the year.

But this is still a slower recovery than in the aftermath of the last two recessions. And about three-quarters of the rise in output experienced over the past 18 months has been in the service sector, which normally accounts for less than two-thirds of the economy's output.

The most rapidly growing area has been business services: one cannot help but feel a little uneasy at the thought of a management-consultant led recovery in which industry is lagging behind.

With the 1993 growth rate decided bar the shouting, attention will turn to the prospects for next year. Independent forecasters expect growth to be between 2.5 and 3 per cent, only just enough to put gentle downward pressure on unemployment.

There are two reasons for caution: the unknown reaction of consumers to next April's tax increases and prospects for exports with European markets still depressed. The Bundesbank-led reductions in European interest rates in the past two days will help to boost Continental demand but they will be slow to take effect.

These clouds on the horizon should convince Mr Clarke not to get carried away by the good third-quarter growth: tax increases must be accompanied by lower interest rates if economic recovery is to be kept safely on track.