As the graph shows the combination of vacancies and unemployment relative to their trends is about

As the graph shows, the combination of vacancies and unemployment relative to their trends is about to enter the danger territory seen in the 1987-89 period. Average earnings increases have admittedly been much more subdued than our equations have been predicting, but basic settlements themselves are now rising quite strongly.Our conclusion is that the long-term trend in the economy may have temporarily been depressed by a lack of capital investment. The underlying inflation rate is at a two-year high of 3.1 per cent, and will probably rise to 3.5 per cent in mid 1996, well above the 2.5 per cent target. Without last year’s monetary tightening, it would almost certainly have moved above the 1-4 per cent range during 1996.The great unknown is how much spare capacity still exists in the economy. It is easy to conclude that output is still some 2-3 per cent below trend, but this depends on a mechanical extrapolation of the long-term trend.This is too simplistic. When interest rates were raised by 1.5 per cent about a year ago, many commentators said this was unnecessary But subsequent inflation figures have proved them wrong.

If a serious recession should develop next year, we would be at a loss to explain why: monetary conditions are basically expansionary, and the private sector is not experiencing the balance-sheet strains that normally precede a recession. If there is a big shift away from trend GDP growth next year, it is more likely to be up than down.A year ago, this prospect would have been quite alarming, since the economy was clearly exceeding the speed limits that lead to rising inflation. Near term, it is quite likely to dip below this rate, because there is more inventory shedding to be done, both here and on the Continent.This will be a rocky time politically But the prospects for growth next year look good. Real disposable in-come will grow by 2.5-3 per cent in 1996, and companies are readily able to finance additional capital spending.

Investment, though, now seems to be growing quite strongly in the manufacturing sector, and surveys for capital spending in both services and manufacturing are encouraging.The big question for policy is which way GDP growth will shift from its present rate, which is quite close to the 2.25 per cent per annum trend. The retail sector was weak in the first quarter, recovered strongly in the second, but has stagnated in the third. Special factors, including the weather, may have artifically depressed consumer spending in recent months. Furthermore,business surveys in continental Europe indicate that our main export markets are slowing. But in the US growth has bounced back quite strongly from the doldrums seen earlier this year. Both have painted a picture of a slowing economy, though not yet a contracting one.

The most worrying feature has been a sharp rise in the balance of companies that believe their holdings of inventories are excessive. This could well foreshadow a quarter or two of declining stocks, which would severely dent the manufacturing sector.Exports slowed earlier in the year, and all the surveys indicate that growth in foreign orders is still cooling off. Usually, this follows the pattern of the Chambers of Commerce and Purchasing Managers surveys. Chancellor, the state of the economy is even harder to read than usual.

Our preliminary forecast for the GDP figures out today shows a rise of 0.4-0.5 per cent in the third quarter. A significant deviation either way from the expected growth when the figures are published will have an important effect on market expectations of interest rates.
So will Tuesday’s CBI survey. The following is what I hope the Treasury told the Chancellor as he pondered his Budget options over the weekend. In the UK, companies have a comparatively good record on customer service, but firms generally compare poorly on factors such as degree of automation, equipment layout in factories and employee involvement.. It will begin with a questionnaire, followed by visits to the company from specialists who assess performance against the database, which has been effectively given to the employers’ organisation.Both the DTI and the CBI are to charge for their services, with the CBI fee expected to be about pounds 1,000.The Government’s enthusiasm for benchmarking is based on studies that show that Britain has its fair share of world-class companies in size and quality of service but an unusually large number of laggards as well, which drag down national performance compared with the chief competitor countries. This database is being used to provide the performance benchmarks.The services will be operated on personal computers through the CBI, Business Links, government offices and trade associations The service will take about two days to complete. He describes them as “self- check mechanisms.”The theory is that by ranking themselves against competitors on a range of criteria, companies are provided with an essential first step to identifying what they need do to improve their competitiveness.IBM and the London Business School have done a detailed assessment of corporate best practice in more than 600 manufacturing companies in the UK, Germany and the Netherlands.