British economy to outpace eurozone

The British economy, Europe’s second-largest, may outpace the euro region for a fifth year in 2004, suggesting the central bank will raise interest rates more quickly than its European counterpart, surveys of economists showed.

British gross domestic product may rise 2.8% next year from an estimated 2.1% in 2003, according to the median forecast of 28 economists surveyed by Bloomberg News. The 12 euro nations may grow 1.8%, the European Commission predicts.

Europe hasn’t matched Britain’s growth since 1999.

British rate rises may outstrip those in the euro region as growth at home and in the US leads the Group of Seven industrial nations out of a slump. The Bank of England may lift rates to 4.5% from 3.75% by the end of next year, according to a separate poll of 29 economists. The European Central Bank may start raising rates from mid-2004, futures trading suggests.

“The US and UK are looking resilient while the euro zone is languishing,” said Ross Walker, an economist at Royal Bank of Scotland Plc, one of six banks trading the most British government debt. He expects the next British rate rise in February.

Faster growth and a pickup in overseas trade may help exporters such as Rolls-Royce Plc, an aircraft engine builder, and GKN Plc, which makes auto parts. Higher interest rates probably will hurt home builders including George Wimpey Plc and Barratt Developments Plc by damping demand for new houses.

Earlier this month, UK Prime Minister Tony Blair’s government said the economy grew 0.8% in the third quarter, the quickest pace in a year and more than estimated in November. For the year as a whole, it expects growth of about 2.1%.

In the 15-nation EU only Spain and Greece will beat Britain’s growth rate this year, expanding 2.3% and 4.1% respectively, the EC said. The US is on track to grow about 3.1% in 2002. Japan’s government expects 1.8% growth in the year starting in April 2004.

The Bank of England lifted its benchmark rate to 3.75% in November, the highest in the G-7. The US Federal Reserve has signalled it will keep its key rate at 1%, the lowest in a half-century. The European Central Bank’s main rate is 2% and at the Bank of Canada’s is 2.75%. The Bank of Japan has had a policy of zero rates since March 2001.

ECB rates “are appropriate given the inflation outlook,” said council member Klaus Liebscher on Monday.