HARD on the heels of the International Monetary Fund's glowing report on Labour's first three months in charge of the economy, the government now faces an even tougher test of its mettle - that of stopping the boom plunging into bust.

For fuelled by the "free" windfall money from building society and insurance company share issues, an inflation-igniting consumer spending spree in the High Street is hitting heights not seen since the late 1980s.

And though tourists going abroad are happily discovering the strength of the pound against overseas currencies sterling's climb to an eight-year high yesterday is already signalling setbacks at home.

For the value of the pound is already driving UK exports to a five-year low, according to a British Chambers of Commerce survey of companies.

A CBI report today on industrial trends was expected to confirm the threat of a strong pound to orders and jobs.

But the dilemma for the Bank of England, given apolitical control of interest rates by Chancellor Gordon Brown, is that raising them again to stem the High Street surge and inflation would send the pound soaring further on the foreign exchanges.

For our exporters it could lead to a even sharper fall in output.

Already one leading economic think-tank has seen a pattern developing that is similar to the one which led to a recession during the first years of Margaret Thatcher's premiership, leading them to predict that there is a one-in-four chance of a recession next year if sterling continues to rise.

Thus, clouds begin to appear over the sunny start that Labour has had with the economy.

And a much stiffer challenge faces the government if it is to get excellent marks in the IMF's next report. It must also be concerned with the voters' response if the boom they are enjoying now suddenly switches to recession.

If higher interest rates are looking a risky economic regulator, the Chancellor may have to turn to the extra taxes which, to the City's disappointment, he left out of his Budget last month - but that will not make the voters happy either.

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