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Friday, June 10, 2005

Doubts Grow Over UK Economy

As the BoE holds rates constant, doubts continue to grow over the path of the UK economy. The evidence is piling up that housing prices have started to fall:

"House prices fell in May but the market remains flat, according to figures out today. The Halifax revealed a 0.6% fall in prices over the month, and said that so far in 2005 prices have dropped by 0.1%. Prices are still up on May 2004, but the year-on-year increase of 5.7% is the lowest in four years and well down on last July's figure of 22.1%. And annual price inflation is expected to fall further over the coming months. The house price index shows that the market is operating in a narrow band with prices hardly moving this year. Prices have moved by just 0.1 percentage point since the start of 2005 and in the last six months three price rises have been matched by three price falls.The Halifax reported that the average house price now stands at £162,411, down from £163,458 in April, but still more than five times the average salary."

These figures are broadly in line with data reported by Nationwide Building Society last week, which showed prices rose by 0.3% during May, while annual house price inflation slowed to just 5.5% - the smallest annual increase since August 1996. Meantime the NIESR has published its annual report on the state of the UK economy:

"Consumer spending growth will slow to a below-trend rate of 1.9 per cent a year in 2005 and 2006 as households respond to the downturn in the housing market by saving more. The savings ratio is forecast to rise from 5.6 per cent of disposable income in 2004 to 6.9 per cent in 2006. An improvement in net trade will mitigate the impact of the consumer slowdown on the economy. GDP growth will slow from 3.1 per cent in 2004 to an annual rate of 2.7 per cent – a little above trend – in 2005 and 2006. The main risk to this forecast will arise if market pressures to reduce the US current account deficit lead to an abrupt slowdown in the American economy."

This forecast has, IMHO, significant downside risks, if the housing market continues to move down, consumption will undoubtedly be hit. The UK could in fact prove to be an important 'test pad' which will give some indication of what might happen in the US when the housing market there slows.

Update: I see that Barry the 'Big Picture' has posted something . more or less along the same lines as what I am saying here.

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