Brown too optimistic on growth, warns OECD

THE OECD yesterday predicted that UK economic growth would be considerably weaker than Treasury and Bank of England forecasts, and recommended further cuts in interest rates.

The Organisation for Economic Co-operation and Development - which cut its forecasts for growth in all industrialised countries - believes the UK economy will grow by 0.8 per cent next year and by 1.5 per cent in 2000. The Chancellor, Gordon Brown, is predicting growth of between 1 and 1.5 per cent next year, and between 2.25 and 2.75 per cent in 2000. Bank of England forecasts are similar.

In its latest "Economic Outlook", the OECD concludes: "Given weakening economic prospects, the margin for manoeuvre to soften the overall policy stance [that is, to reduce interest rates] should increase. Provided inflation remains under control, this margin should be used."

According to the OECD, UK growth could be even weaker than forecast if economic conditions in Japan fail to improve or if the Bank delays further interest-rate cuts because of misplaced concerns about domestic wage pressures.

The latest OECD forecasts coincided with more evidence of the UK's continuing economic slowdown. Inflation hit target for the third successive month, according to new official figures, partly because tough conditions on the high street have prompted sharp falls in clothing and footwear prices.

The underlying rate of inflation targeted by the Bank remained unchanged at 2.5 per cent in October, while the overall level of retail price inflation fell by 0.1 points to 3.1 per cent, its lowest level since June 1997.

Goods inflation hit an all-time low of 1.1 per cent, and services inflation - down 0.1 points to 3.4 per cent - would have fallen further had it not been for the introduction of university tuition fees.

Jonathan Loynes of HSBC Securities said: "I think there's a good chance that inflation will fall decisively below target over the next six months, helping the Monetary Policy Committee to bring rates down further."

Separate figures from the Office for National Statistics (ONS) revealed that the Government's budget surplus was a larger-than-expected pounds 7.9bn in October.

The OECD said it expected the Government to meet "comfortably" its golden fiscal rule - that is, only borrow to invest - over the course of the economic cycle.