Slowing down of growth forecast

Yesterday's news of a surge in inflation to a 10-year high indicates the UK economy is running hotter than many commentators had thought.

Yesterday's news of a surge in inflation to a 10-year high indicates the UK economy is running hotter than many commentators had thought. The economic medicine of higher interest rates could put the brakes on strong economic growth in the North-East. Nigel Stirling surveys the regional economy's prospects for 2007.

An all-time high. That's the point that the North-East economy reached in 2006, according to the region's chamber of commerce chief, James Ramsbotham.

Responding to the Royal Bank of Scotland's latest PMI Business Survey this week, the recently-installed North-East Chamber of Commerce chief executive said: "This [survey] backs up the message that we have been trying to get out that the North-East economy at the moment is as strong as it has ever been."

And the figures would appear to back up the contention that the regional economy enjoyed a very good year last year. According to the latest available figures from the Office for National Statistics, the North-East economy grew by a staggering 4.4% in 2005 compared to 3.9% across the whole of the UK.

The Chamber believes that last year's rate of growth for the North-East economy will have been between 0.25% and 0.5% stronger than 2005's.

"I am hopeful that 2006 will be a lot stronger than people are giving it credit for because we have not got all the data in yet," Mr Ramsbotham predicted this week.

The regional economy has been supported by exceptionally strong growth in the construction and services industries, which last year saw growth of 10%. A "mini-recovery" in the manufacturing sector, with more modest output growth of 2.5% in 2006, also contributed to the region's strong performance.

Three weeks into the New Year, and all the signs are that the regional economy will not perform as strongly in 2007, with two out of these three sectors - manufacturing and construction - picked to struggle to repeat last year's performance.

According to economics consultancy Oxford Economics, the North-East economy, on an inflation-adjusted basis, will grow at 2% in 2007 compared to 3.5% in 2006 and 2.3% the year before.

Manufacturing output growth will slow to 2% in 2007, according to manufacturers' organisation EEF Northern, as predicted low oil prices curtail investment in the offshore industry.

The prospect of more interest rate rises, following yesterday's news that inflation broke through the all-important 3% barrier, could also put further upward pressure on the pound and undermine exporters' margins, according to the EEF.

Economists predicted the Bank of England will up the base rate again for the fourth time since August, by another quarter point to 5.5% as early as next month on the back of yesterday's news that inflation had hit a 10-year high.

Another key plank to the North-East's strong performance has been an abundant source of new entrants to the workforce from eastern Europe.

According to NECC figures, 17,000 eastern Europeans joined the North-East workforce in 2006 out of a 33,000 total increase in the region's workforce between October 2005 and October 2006. Retirees returning to the workforce have also helped restraining wage price inflation.

Pete Cochrane, senior economist at Royal Bank of Scotland, said: "In December, service providers in the North-East indicated that wage costs are rising. That is typical across the country as a whole. The number of older people returning to the labour force and immigration has been increasing.

"If there is continued expansion of the labour force then we should see moderation of those [wage] pressures. But if those supplies of labour dry up then we could see pressure on wages continue upwards."

But Mr Ramsbotham is more upbeat: "The North-East has a situation of functionally full employment where there are more vacancies than job applicants.

"That would normally lead to a situation of spiraling wage inflation. There would not have been the growing labour pool from these sources that there were five years ago. There are issues of shortages of skilled labour but I do not see that as the biggest cloud on the horizon."

The construction industry, one of the strongest performing sectors in the North-East economy, which has grown by 29% in the last five years, could be one of the biggest casualties if the Government imposes restrictions on the number of new workers from Romania and Bulgaria, which joined the EU on January 1. Service industry chiefs, however, were confident this week that the sector's 10% growth rate in 2006 - supported by strong growth in the last six months of last year in the region's legal, accountancy and marketing businesses - can be sustained in 2007.

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