The impact of still higher US interest rates and the dollar on financial markets is discussed in other parts of the Bulletin. Although these rises could have a dampening effect on domestic demand in other countries, the associated strong demand in the US economy so far has stimulated exceptionally rapid world trade growth. Activity in the major industrial countries has generally grown faster than expected and inflation remains subdued, but economic recovery outside the United States is stiff fragile.
In the United Kingdom, even allowing for the immediate effects of the miners' dispute, the growth of output and demand seems to have become more hesitant, with higher net imports and a slower rise in industrial investment. Employment in the service industries continues to increase and there are some signs that the fall in manufacturing employment may have been checked; but unemployment has risen further.
Total domestic costs and retail prices continue to rise at about 4½%-5% while average earnings have been rising at an underlying rate of 7½%-8%. The rise in manufacturers' unit labour costs, seems to have accelerated since the end of last year, whereas in other industrial countries, where earnings have grown less, unit labour costs have generally been falling. The decline in sterling's effective rate has broadly compensated for this competitive disadvantage but it has also offset falls in the dollar price of many materials used by UK industry.
Although in financial surplus, both the personal and company sectors increased their bank borrowing in the first half of the year by more than they built up their deposits. Personal sector borrowing from building societies was also buoyant.