The economy is set for further rapid expansion next year, according to the latest OECD Economic Outlook and the rate of employment growth will be among the highest in the industrialised world.
According to the Paris-based organisation, growth could pick up further if inward migration accelerates, but it warns that there are also inflationary dangers on the horizon.
Overall, the OECD believes that growth will be at a slightly more moderate pace next year as import prices rise, reducing the growth of real incomes and pushing up inflation somewhat.
According to the OECD Gross National Product rose by 7 per cent, marking the fourth year in which the economy had expanded by 7 per cent or more. A 6.9 per cent rise in GNP is pencilled in for 1998.
At the same time, Gross Domestic Product is expected to have increased by 7.5 per cent this year, falling slightly in 1998 to 7.3 per cent and then to 6.1 per cent in 1999.
However, going into next year the OECD warns that private consumption may slacken, as the rate of inflation picks up somewhat. The OECD is predicting rising inflation on the back of higher import prices resulting from the fall in the pound against sterling.
As a result, the business climate may become slightly less expansionary, particularly in the retail sector, according to the OECD.
It also points to the rise in house prices relative to incomes which may also put downward pressure on the growth of residential investment.
Despite this, employment is expected to grow rapidly, jumping by 5 per cent between 1997 and 1999, one of the largest increases in the OECD area. Some of this, according to the OECD, will be met by increased labour force supply. However, it is also expecting a further fall in unemployment helped by increased educational standards and a gradual reduction in the welfare to work disincentives.
The OECD report also points to a number of risks to this optimistic scenario. The main one is the danger that the difficulty in reducing the rate of growth in private sector credit. Bottlenecks in employment growth in some sectors of the economy could also generate inflation and result in a reduction in the current account surplus, the OECD states.
Inflationary pressures could also accentuate, it warns, if customers continue to reduce savings. But on the brighter side, if the pace of inward migration continues or accelerates the current pace of expansion could be prolonged.
One of the reasons for the high growth this year was rapidly accelerating industrial production which was running at 16 per cent in the year to July, reflecting a surge in the output of the computer and pharmaceuticals.
