The economy is slowing down but showing every sign of achieving the "soft landing" that has often proved so elusive to Governments in the past. Data released in January ⁽¹⁾ confounded the worst predictions of recent months. The keenly-awaited data for the fourth quarter Gross Domestic Product figures - the sum of all the economic activity in the country - show the economy grew by 0.2% in the final three months of 1998. These figures mean that, overall, the economy has grown 1.6% on the same period a year ago.

Economists had predicted the quarterly figure to show zero growth with the annual figure up a meagre 1.4% for example, Oxford Economic Forecasting had predicted a decline of 0.2% and said the economy would finish 1998 in recession. They were wrong. As the graph below shows, the rate of growth in 1998 has dropped too low to prevent unemployment from rising, it has assumed a far smoother pattern than had been feared. Stable but low growth is marginally better than erratic or negative growth.

Although the latest data shows the smallest quarterly growth figure since 1992, the fear that Britain is heading for a recession now appears to have been overstated. A "recession" is technically defined as two successive quarters of negative growth and the whole economy looks like being spared even 1 period of negative growth. So far all individual sectors of the economy have been spared this phenomena too.

However, revised figures now indicate that the manufacturing sector did slip into negative growth in the 3rd quarter (with output falling by 0.1% compared with growth of ½% in the previous period). As the graph shows, manufacturing output is subject to quite erratic swings between quarters and the problems facing the sector seem to pre-date the current Government’s decision to give the Bank of England the power to let both Sterling and interest rates rise.

The latest numbers reveal that the service sector continues to provide a much-needed boost to the economy - by growing some 0.6% in the final quarter of 1998. So, over the last full year when growth measured 1.6% for the whole economy, the service sector contributed growth of almost 3%.

Data for individual sectors are only available for the 3rd quarter and, according to the Office for National Statistics, only agriculture, forestry and fishing have shown an overall annual decrease:

ONS statisticians believe that communications and business services have again performed well in the 4th quarter. The energy extraction sector is thought to have grown sharply - although this is a highly seasonal industry and output tends to be quite erratic.

Consumer activity has declined markedly according to retailers, several of whom issued profit warnings early in January. Figures from the British Retail Consortium (BRC) show that sales dropped sharply during their survey period covering 29th November to 2nd January. Although the Survey is based on a sample of 75 retailers, these account for almost half the total of UK retail sales. On an annualised "like-for-like" basis, the BRC says that - by value - sales fell by 0.6% in October, 0.4% in November and no change in December.

ONS retail sector figures released on January 20th confirmed a shock 0.9% fall to shop sale volumes in December compared with November. The decline - which followed a small rise between October and November - was evenly felt between food and non-food retail sectors. Taking the less erratic data for the final quarter and comparing it with the 3rd quarter saw food sales remain unchanged but non-food sales decline by 0.6%.

The danger revealed by the retail data is that doom-laden newspaper headlines about "recession" are putting consumers off from spending and consequently risk becoming a self-fulfilling prophecy.

Many forecasters now believe that, with hindsight, the latest figures will prove to be the weakest in the cycle. Growth is expected to pick up during 1999 with a consensus emerging which estimates GDP growing by 0.6% in the year. More bullish is the Treasury which is maintaining its projection for 1999 of 1% - which is admittedly only half the previous forecast of 1.75 to 2.25% predicted at the time of the March 1998 Budget.

Growth seems certain as the effects of relaxation in monetary policy come through. The Bank of England’s Monetary Policy Committee has now cut interest rates four times in as many months, by ¼ of a percentage point each time, to the current level of 6%. The Bank’s approach to interest rates is likely to head off the type of full-blown recession seen in the early 1990s and early 1980s. And other potential weak points in the economy are far less serious with, for example, household and corporate debt levels at much lower levels than prior to previous slumps.

In its latest quarterly economic survey, the British Chambers of Commerce (BCC) reports that manufacturers are still struggling but there are faint signs of hope, while the decline in the service sector is gathering pace. Company losses have continued and firms are now shedding staff for the first time in five years, with the rate that jobs are lost expected to accelerate. The survey, which is the largest and most detailed of its kind, shows that overseas sales and manufacturers' confidence have improved slightly after a period of sustained decline. The survey also shows that service sector firms are seeing a rapid deterioration in growth at home, with sales at their lowest level for six years.

Service exporters continue to report losses in overseas markets, with orders at the same record lows recorded in 1991. Job growth in the sector is still at a three-year low.

The bulk of redundancy announcements in December and January were overwhelmingly in 3 sectors: manufacturing which accounts for a third of all announced lay-offs; the petroleum and chemicals industry which makes up over a quarter of job losses; and in textiles which experienced a quarter of the major redundancy announcements in the last 2 months.

Announcements do not translate immediately into rises in unemployment however. And some company decisions are reversed or alternative plans realised. For example, at the Siemens semiconductor plant in Newcastle where 1,100 job losses were announced in July, 600 employees had left by Christmas with another 250 likely to go by the end of January. However, a management led buyout plan is being considered and a halt has been called to demolition and decommissioning work at the factory.

(1) Office for National Statistics, First Release, ONS (99)27, 22/01/99