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mpc: 2 indicated higher activity than currently recorded in the national accounts, rather than an increase ineffective tax rates. The implications of this for inflation depended in part on whether anyunder-recording of output was matched by a commensurate under-estimate of potential output. 5 Overall, the broad fiscal picture looked somewhat tighter than had seemed probable a monthago. The impact on future activity and inflation seemed to be fairly small, although that would, inpart, depend on whether the Budget had any lasting effect on sterling's exchange rate. Moreanalysis would be needed once the full details of the Budget were known.

Demand and output

6 Prior to the recent release of 1999 Q4 output and expenditure data, the picture had been one of agradual slowing in the annual rate of growth of final domestic demand from around 4½% to around3% - 3½%. The latest data showed that the rate was now back in the 4% - 4½% range at the end of1999, on account of upward revisions to both consumption and investment. Considered in this waythere was less evidence that final domestic demand was slowing to a more sustainable pace.However, it was possible to analyse the data in a variety of different ways. For example, smoothingthe data over two quarters still suggested a moderation in the rate of growth during 1999.Furthermore, the growth rate of final domestic demand in the fourth quarter had been in line withthe February Inflation Report central projection. 7 There was a 1.2 percentage point negative contribution from net trade to GDP growth in Q4,much larger than expected. This, in turn, had been offset by a stronger-than-expected contributionfrom inventories, so that total domestic demand growth was much stronger than expected. It waspossible that these two factors were linked, as the increase in stocks might be import-intensive. Inaddition, some of the change in net trade on the quarter might be erratic. Nonetheless net tradelooked weaker than had been previously thought and possibly reflected quicker or larger effectsfrom the most recent appreciation of sterling, or a delayed response from the past appreciation ofsterling. This suggested that even if the overall pace of output growth was as expected, the mix ofaggregate demand ­ between domestic demand and net trade ­ now looked less benign than it hadappeared a few months ago when the net trade contribution had for a while been positive. 8 On inventories, it was possible that the increase might also prove to be erratic. It was stilldifficult to assess the size of the millennium effects. In addition, the change in manufacturing,wholesale and distribution stocks did not account for much of the aggregate change in inventoriesover the quarter. The increase was largely accounted for by `other' industries, which included thequarterly statistical alignment adjustment. The rise in stocks in these industries in Q4 might also belinked to the recent weakness of car registrations. If, for example, the number of car registrations