Outlook: Consumers need to keep spending to underpin recovery

British Airways; House price indices
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The Independent Online

One swallow does not a summer make, but we've now had two or three of them and yesterday there were more still. British manufacturing output rose 0.5 per cent on the month in July, its fastest rate since last November, with much of the rise coming from the previously bombed out electricals sectors, including computers. The National Institute of Economic and Social Research, whose record is better than most, estimates that annualised growth in the three months to the end of August was an impressive 3.1 per cent.

Few business leaders seem to have noticed this rebound in the economy, it has to be said, but if the National Institute is right about the strength of the recovery, then it may also be right in predicting interest rate rises by the late autumn. We'll see.

As yesterday's figures demonstrate, much of the rebound is coming from industry, which has benefited from a period of relative currency weakness. Consumption has meanwhile remained strong, so it hasn't taken much in the way of an upturn in industry for the economy to be showing decent levels of growth again.

None the less, the National Institute's call to arms on interest rates may be a bit premature. From the early summer, both consumption and the housing market seem to have experienced a second wind. It doesn't seem likely that will continue. Consumption has been growing more strongly than the rest of the economy for more than five years now, which is possibly the longest period of such growth in recorded history.

If it continues to storm away while industry recovers, then we ought to see very significant levels of economic growth over the next year or two. Yet nobody thinks that at all probable. Indeed, the likelier outcome is that consumption will deteriorate faster than industry can recover. So overall growth may remain subdued. All the signs are that the recovery has now definitely begun, yet the climb back to economic vitality may be a long one.

British Airways

Rod Eddington, chief executive of British Airways, has a reputation for plain speaking. Well, he is from down under. Unfortunately, his latest observations have almost certainly put the kibosh on BA's chances of rejoining the FTSE-100 Index. Whereas other companies tend miraculously to find some snippet of good news (or at least avoid trumpeting the bad news) when they are clinging on to their place in the Footsie or trying to gain promotion, BA's man has told it ramrod straight.

Mr Eddington's message to yesterday's UBS transport conference was as direct as it could be: if you think the airline industry is in the recovery lounge, forget it. The effect on the BA share price was equally direct and it will take a soaraway performance today for the airline to deny Yell the place in the index which Kelda is about to forsake.

While he did the BA share price no favours, Mr Eddington's reality check for the airline industry could not have been more timely, coming as it does in the week that the world commemorates the second anniversary of the attack on the Twin Towers. The disclosure that several airlines including BA are investigating anti-missile defences for passenger jets is a reminder of how vulnerable the industry remains to terrorist outrage.

The propensity for passengers to vote with their feet and either not fly or find other modes of transport every time airlines try to increase fares is a reminder, meanwhile, of how price-sensitive the market remains. Sars and the Iraq war may be behind us and there may have been a couple of months of half decent traffic figures. Yet to put things into perspective, business class travel across the Atlantic is still down 20 per cent on 2000, while long-haul yields generally are still below the level they fell to in the immediate aftermath of 11 September, 2001.

There may be the first tentative signs on the horizon of recovery in long-haul markets. But the premium market in short-haul travel does not look like it will ever recover for the flag carriers as Michael O'Leary's Ryanair and his low-cost compatriots sweep all before them.

In the face of all this, BA and its fellow full-service airlines can only continue with their own savage cost-cutting drives. Mr Eddington's message to staff and investors alike was as clear as it could be: Don't unfasten your seat belts quite yet.

House price indices

For long Britain's monopoly producer of stock market indices, the Financial Times has belatedly decided to produce its own index of house prices, which of course most people including the Bank of England's Monetary Policy Committee follow a lot more closely than the stock market. In stark contrast to last week's survey by HBOS, which showed a revival in the market with year on year house price inflation in August still motoring along at 19.1 per cent, the FT index shows prices just 4 per cent higher last month than a year earlier. Plainly they cannot both be right. Indeed, given the difference, it seems more than likely both of them are wrong.

The absence of a reliable contemporaneous measure either of levels of housing activity or of prices is a growing source of irritation at the Bank, whose monthly discussions of interest rates are sometimes dominated by what's going on in the housing market. If the Bank is stumbling around in a fog of ignorance, there's bound to be a high chance of incorrect policy.

As things stand, there are four main indices and a couple of also rans, all of which suffer from drawbacks of one form or another. The only wholly reliable one is the measure produced by the Land Registry, as this is a compilation of recorded transaction prices. Unfortunately the figures are historic and anyway only published on a quarterly basis. The other contender for the fully Kosher index is the one produced by the Office of the Deputy Prime Minister, which next week goes monthly. Again the drawback is that it's historic. The monthly figures will reflect what was happening in the market three months previously.

For a contemporaneous view, the indices produced by Britain's two leading mortgage lenders, the Halifax and the Nationwide, are the most watched. Yet both of them seem to exaggerate the reality. The last Land Registry figures showed second quarter growth of 12.5 per cent. Both Halifax and Nationwide were showing year on year inflation of more than 20 per cent throughout that period. The difference is mainly explained by the fact that the lenders adjust for volume, season and mix. They also reflect offer, rather than completion, prices, which in a slowing market may make a difference. The Land Registry figures, by contrast, are a simple average of sale prices throughout the period.

Into this confusion steps the FT. To describe the FT's stab at the problem as little more than a guess would be unfair. The index takes its raw data from the Land Registry, Halifax and Nationwide numbers, and then crunches them through a model to arrive at a hopefully accurate view of the real state of the market. Four per cent certainly sounds more likely than 19 per cent, especially if you live in London, yet even when the Land Registry figures are published there will be scope for argument about which index better reflects the true position.

There seems no obvious reason in an age of real time information why the Land Registry cannot produce more timely figures. Therein lies the only foolproof solution to the problem. Until that happens, the present position, with newspaper headlines proclaiming soaring prices one day and crashing prices the next, looks set to persist. Over time, the new FT index may win credibility, but until that happens it will only add to the confusion.

jeremy.warner@independent.co.uk

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