The invisible boom

The unique feature of this general election is that it is the first to be held in Britain with an independent Bank of England setting interest rates. This was designed by Gordon Brown specifically to prevent politicians engineering a pre-election spending boom. So how come there is an almighty pre-electoral spending boom going on right now - even though the Conservatives have not noticed it? Yesterday's figures show that retail sales volume rose 5.9% in April compared with a year earlier. This is the biggest rise in an election month in recent memory. It beats the 4.9% recorded in May 1997, the 1.2% of April 1992, the 3.8% of June 1987, the 4.9% of May 1979, and eclipses the 0.2% of October 1974 and the minus 1.2% in February 1974.

It is equalled only by the 5.9% recorded in June 1983, when the Tories were fighting an election where retail spending was artificially boosted by the abolition of hire purchase controls and the "leakage" of mortgage money into consumer spending. You would not think consumer spending was so high from looking at manufacturing production: it declined in the last three months and is only 1.1% above a year ago. In other words most of the extra spending has gone on imports - helping to swell the trade deficit to record levels (another fact Tories have not cottoned on to yet).

Why is retail spending so high? Partly because buoyant house prices coupled with low unemployment have kept the "feelgood factor" high. And partly because many people have lots to spend thanks to high pay increases - up 5% on average against a 2% rise in prices - and lower interest payments. The trouble is this spending spree cannot go on forever. The chancellor has to make room in the economy for sharp rises in public spending (6% a year for health and education). If he does not, then the economy will overheat, leading to fresh inflationary pressure. Do not release your safety belts yet. There could be turbulence ahead.