Hamish McRae: Is Britain's economic boom over?

Brown's boasts that we have had the longest growth since records began may ring hollow in his ears

The timing appears exquisite. Just at the very moment that the Labour government wins re-election largely on the grounds of its economic competence, the economy starts to turn down.

The timing appears exquisite. Just at the very moment that the Labour government wins re-election largely on the grounds of its economic competence, the economy starts to turn down.

Suddenly there is a mood of fear on the high street. Shops accustomed to volumes bounding ever upwards - albeit with prices clamped down - are finding sales flat at best, and at worst heading south. Maybe those boasts of Gordon Brown that Britain had had the longest expansion since records began will ring hollow in his ears. Now that he seems to be confined to his job a wee bit longer, he won't be able to blame any downturn on the policies of his successor.

But is it true? Things are slowing; there is no doubt about that. But are we really nearing the end of the boom? Maybe that is too apocalyptic and we're just having a typical mid-expansion pause.

This is enormously important for obvious political reasons. It is also enormously important for obvious personal reasons, for everyone suffers if the growth machine that has increased the size of the UK economy by about 50 per cent since the early 1990s is faltering. So what do we know?

There are several bits of evidence, some in the UK, some abroad. The UK first. The housing market is now stable: prices are not falling but they are not rising either. The purest measure is the Land Registry, which shows what is actually paid for property, and figures there were up 0.3 per cent in the first quarter of this year against the last quarter of last.

Next, take retail sales. In recent years, they have been up in volume between 4 and 6 per cent a year. Now they have actually fallen for a couple of months and are expected to rise in volume by perhaps 2 per cent this year.

That may be optimistic. Remember that the price of goods in the shops is falling - consumer prices as a whole are rising because the increase in charges for services more than offsets the lower prices in the shops. The British Retail Consortium says that sales in April were 1.3 per cent lower than a year ago. There may be some distortion here because of the early Easter, but the point is that we seem to be heading into a situation where the statistics say we are increasing our consumption, but because prices are falling the amount of money spent in the shops is falling.

Of the rest of the economy, manufacturing is very flat. Indeed, industrial output is now at its lowest level since autumn 1996. Private sector services are still growing slowly and government spending is still rising quite quickly. Exports? Not great. Or rather, physical exports are not doing well, though most service sector exports seem to be holding their market share.

Put all this together, and the Treasury's estimate that the economy will grow by 3-3.5 per cent this year looks vulnerable. True, the Treasury has been right in the past and the private sector forecasters wrong, but there are two reasons this time to question the Treasury's wisdom.

One is that the Government has pumped up demand by more than the Treasury expected. You may recall that, in recent years, the Government's deficit has tended to be bigger than the number they first thought of. One way of looking at that is to say: "Oh dear, they had to borrow more than they expected." The other way is to say: "They gave the economy more of a fiscal boost than they had planned."

So, yes, the Treasury has got its growth forecast right, but only because it got its budget sums wrong. Now, while the Treasury can go on borrowing at about 3 per cent of GDP, it cannot go on increasing its borrowing. So if demand from the rest of us slackens, as it seems, the Government cannot replace that demand by puffing up its own spending.

The other reason to question the Treasury's wisdom is external. The world economy seems to be slowing. In the early part of this year, continental Europe seemed to be picking up just a little after a dreadful final three months of last year, during which the economies of Germany, Italy and the Netherlands all shrank.

But the very latest data suggests that this modest revival may now be over, for business confidence fell sharply. Retail sales in the eurozone have growing at less than 1 per cent a year since the end of 2001, so any flop back now would be pretty tough for European consumers. But it would also be bad for British business because the eurozone takes half our exports.

The big worry for Europe and indeed the UK is that the one area in the developed world of strong growth, the US, will slow too. In the first three months, it grew at 3.1 per cent, which sounds fine enough, but actually was rather lower than expected. There is, as yet, little sign that the Great American Consumer is slackening off, but interest rates are rising, energy costs are up, core inflation at 2.3 per cent is increasing - and their booming housing market seems anecdotally to be easing off.

So while it is far too early to say that the US boom is over, it has become a little wobbly. And there are several more increases in US interest rates expected in the months to come.

One of the many difficulties of economics is that the lags between a policy being brought into action and the economy responding are uncertain. It is the supertanker phenomenon with a twist. The helm is put over and after a few minutes the ship starts to swing to port. To stop it and hold on the new course, you have to put the helm to starboard for a bit. But the trouble is that sometimes the ship responds quite quickly and sometimes does not seem to respond at all. That is the time when you make mistakes.

Take Britain. There were a string of increases in interest rates last year, bringing the base rate to 4.75 per cent. Nothing happened. Growth cantered on, house prices continued rising. Then suddenly this year, the housing market stalled and now, it seems, retail sales have stalled too. Wisely, the Bank of England stopped increasing rates last year, despite its worries about inflation, and last Monday held them again. So it may, fingers crossed, have got things more or less right. It may even be that the next move in UK interest rates will be down, not up.

But the US Federal Reserve may not be so lucky. It delayed increasing rates and now has to do so in the face of slackening global demand. While we are not directly affected, bad news for the US economy is bad news for the rest of us.

So will this turn out to be the end of the UK boom? Well, it could be, but alternatively it may well turn out to be just a pause, with growth picking up again. But one thing is absolutely for sure. Consumption in Britain is going to grow more slowly in the next four years than it did in the past four. We will remember that when we judge Gordon Brown's legacy as Chancellor.