GORDON BROWN is becoming increasingly concerned that a slowdown in the global economy could undermine Britain’s prospects next year. His worry comes on the eve of the latest interest-rate hike by the Federal Reserve in America.
The US central bank will raise its key Fed Funds rate from 1.5% to 1.75% on Tuesday, its third rise since June. Market attention will focus on the Fed’s accompanying statement for any indication that the pace of rising rates may slow.
The chancellor’s worries about growth were to have been the centrepiece of his remarks to union leaders at last week’s TUC conference but he had to be called away, to be at the bedside of his sick mother. Officials said it would be a big theme of the coming IMF and World Bank meetings.
The Treasury, which in the last budget predicted growth in Britain of 3%-3.5% next year, matching this year’s forecast, factored in only a fractional slowdown in global growth.
But independent forecasters, who predict that growth in Britain next year will be closer to 2.5%, believe the Treasury will turn out to have been too optimistic in the light of high oil prices — still over $40 a barrel — and the shift in many countries to higher interest rates and tighter budgetary policy.
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Economists said a loss of momentum in the American economy would hit global growth significantly. “The slowdown has a lot to do with the removal of the fiscal and monetary stimulus and the innate conservatism of the US corporate sector,” said Ian Harwood, chief economist at Dresdner Kleinwort Wasserstein. “Businesses are going to be very cautious about hiring and expanding.”
Mark Cliffe at ING Financial Markets said the oil market would remain nervous. “People will focus on whether George Bush will be re-elected and whether that means Iran will be Iraq II,” he said. “The risks to the world economy are clearly skewed to the downside.”
In Britain, attention will focus on the minutes of this month’s meeting of the Bank of England’s monetary policy committee. Ideaglobal.com, a research company, said analysts expect the MPC to have voted 9-0 to leave the base rate unchanged.