Rate fears grow as US expansion accelerates

The US economy roared into the 21st century, expanding at its fastest rate for a year in the final months of 1999.

The US economy roared into the 21st century, expanding at its fastest rate for a year in the final months of 1999.

The economy grew by 5.8 per cent in the last quarter of the year, the US government reported yesterday, fed by consumer demand and by an increase in inventories.

The sizzling US economic performance sent the euro to further record lows. It fell below 99 cents in London then headed past 98 cents to as low as $0.9750 in New York.

Economists said the currency's continuing decline must now be causing alarm within the European Central Bank. Ernst Welteke, the Bundesbank president and a member of the ECB council, said yesterday the weakness was a "psychological problem", adding that the central bank remained vigilant on inflation.

With US prices showing sharper-than-expected increases, the financial markets retreated ahead of next week's meeting of the US Federal Reserve.

In New York, the blue-chip Dow Jones Industrial Average fell as low as 10,836.29, 191.73 points down, in morning trading while in London, the FTSE 100 index ended down 65 points at 6,375.6.

The markets expect an interest rate increase in the US next week but have not yet completely decided by how much the Fed will move. The 30-year US Treasury bond fell by a full point, and the yield moved up to 6.59 per cent from 6.52 per cent at Thursday's close.

The American economy is entering the ninth year of its expansion, which next week will become the longest on record. It has grown by more than 50 per cent during the current recovery, led by a massive doubling of gross private fixed investment. The largest part of this has been a 130 per cent increase in spending on equipment and software.

Tempering America's euphoria are concerns that after more than eight years of growth, inflation is starting to creep into the system. The GDP price deflator increased to an annual rate of 2 per cent from 1.1 per cent in the third quarter.

A separate report showed that labour costs rose by more than expected. The Employment Cost Index rose by 1.1 per cent in the fourth quarter after a 0.8 per cent gain in the third quarter. Labour costs increased by 3.4 per cent for the year as a whole, the same as in 1998.

Separate figures showed the UK's GDP rose 0.8 per cent in the final quarter of 1999. The British economy has also entered the record books, clocking up 30 quarters without a fall in GDP. Previously, there were 19 quarters of continuous growth between the final quarter of 1985 and mid-1990.

National output in Britain has risen 23 per cent since the start of the current recovery. Growth slowed to 1.9 per cent in 1999 from 2.2 per cent in 1998, but the year-on-year rate climbed to 2.7 per cent in the final quarter of 1999 from 1.9 per cent in the third quarter. Mobile phone manufacture and usage were among the strongest components of growth as the year ended.