Economic commentary

Published on 01 March 1986

The growth of output in the major industrial countries strengthened, and inflation fell, in the second half of last year.
The sharp fall in oil prices will improve the prospects for maintaining the growth of output and lowering inflation in industrial countries.
The dollar weakened during the first quarter of 1986; there was downward pressure on interest rates accompanied by cuts in official rates in most major centres in March. Yields on long-term bonds also fell, reflecting an improvement in inflation expectations.
The UK economy continued to grow during 1985, and GDP(A), adjusted for the miners' dispute, was 2½% higher than in 1984. But growth slowed in the second half of the year.
The annual increase of retail prices fell to around 5% in early 1986, reflecting lower commodity prices and the appreciation of sterling during much of 1985.
The rate of growth of earnings in manufacturing remains well in excess of inflation, and, although growth of productivity was maintained, unit labour costs rose faster than those of competitors.
Although real interest rates remained strongly positive during 1985, they app eared to have little marked effect on the growth of credit; both consumer credit and mortgage lending strengthened in the second half.
The March Budget provides for a net tax reduction of £1 billion in 1986/87; the target for £M3 is reinstated and the PSBR is projected to fall to 1¾% of GDP in 1986/87.