§ While activity has been falling in many parts of the world, GDP in Britain rose slightly in the second half of last year. With interest rates down by four percentage points in just six months, Britain enters the year ahead in a more favourable position than most of our major competitors. That is confirmed by the European Commission, which expects Britain to be the fastest growing of all the major European economies both this year and next.
§ The substantial interest rate cuts I have made provide a solid foundation for recovery this year, and they come alongside the measures in my autumn statement to revive business confidence. We are already beginning to see their effects.
§ Lower interest rates have contributed to a pick-up in the growth of narrow money, while retail sales have been on a steady upward trend for almost a year. The abolition of car tax has prompted a surge in activity in the motor trade, right at the heart of British manufacturing. New car registrations were nearly 16 per cent. higher in the latest three months than a year earlier.
§ By the end of this month, the additional money that I provided in the autumn statement will have taken about 20,000 properties off the housing market. Although house prices remain weak, building society commitments and advances are stronger, and both house builders and estate agents are now reporting increased activity.
§ The extra support that I announced for British exporters will reinforce the competitiveness of our companies trading overseas, while exports in the last three months of 1992 were already at record levels; and the temporary increase that I announced in capital allowances will provide a continuing boost to business investment over the next six months. According to the CBI, manufacturers are more optimistic now than at any time for almost five years.
§ The recovery we have seen in confidence rests, above all, on one crucial foundation—the dramatic progress that we have made in getting inflation down. There has been much debate about Britain's experience with the ERM. Today I wish to make just two observations. First, it was absolutely vital to get inflation in this country down. The two years that we spent in the ERM were tough, but the war against inflation was one we had to fight, and one we had to win. Secondly, once sterling left the ERM, and with inflation sharply down, we were right to take the opportunity that that gave us to relax policy and get interest rates down.
§ Inflation is now at its lowest level for over 25 years. The rapid fall in the headline rate is, of course, partly the result of the reduction in mortgage rates; but even more significant is the fall in the underlying rate. That is down in the last year from 5½ per cent. to 3¼ per cent. Except for a few months in 1986, after the collapse in the oil price, underlying inflation has not been this low since February 1968.