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Overview ...

The labour market data published in the UK last week showed that vacancies increased by 13,000 in June. This was the biggest monthly rise of this recovery and confirmed an acceleration in the growth rate of vacancies that began at the beginning of this year.

In the second quarter vacancies were almost 15% higher than a year earlier, up from a low of under 7% in the final quarter of 1995.

Historically, the growth rate of vacancies has been a very good coincident indicator of the strength of the economy.

Recent developments suggest that real GDP growth will soon accelerate from just under 2% to over 3%, offering support to the Treasury's view that it will increase by 3.25% in 1997.

Rising vacancies also indicate that the labour market is tightening and that there is a risk of higher wage pressure ahead.

This impression was confirmed by the British Chambers of Commerce in their latest quarterly survey, published last week. This showed that 63% of manufacturing companies and 55% of service sector companies are experiencing recruitment difficulties. The figures for manufacturing are particularly worrying, given the weakness of activity in this sector in the first half of the year. Should manufacturing improve, as we anticipate, staff shortages could soon become severe - especially for skilled workers - putting upward pressure on wages and eventually risking higher inflation.

These are the sort of considerations the Chancellor should be considering when he decides whether or not to reduce interest rates again. Instead, though, he may choose to focus on the small fall in average earnings growth in May, to 3.5% from 3.75% in April.

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