A cut in rates needed to keep UK plc pretty

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The Independent Online

Interest rate cuts may be needed this year to kick-start the economy, two reports will conclude today.

Interest rate cuts may be needed this year to kick-start the economy, two reports will conclude today.

Deloitte warns that 2005 is likely to be the start of a more difficult trading period for the UK economy, in the accountants' latest economic review.

The report predicts interest rates will drop to 4 per cent by the end of the year and then to 3.5 per cent or lower in 2006.

Its author, Deloitte economic adviser Roger Bootle, says the situation is best described as "the chickens now coming home to roost".

The two principal stimuli for the economy - the housing market and public spending - are slowing down substantially and no major driver is ready to help overcome the deteriorating global economic climate, Mr Bootle says. He also thinks the situation is likely to be exacerbated by tax rises next year.

However, Mr Bootle believes that "the situation is not all that gloomy", concluding: "We're still expecting GDP growth of 2 per cent this year."

According to another firm of accountants, Ernst & Young, corporate profit warnings in the UK have reached their highest level in two years. This situation has prompted E&Y to caution that further profit warning rises could indicate "a significant deterioration" in the health of corporate Britain.

E&Y reveals that the number of warnings by listed UK companies jumped to a two-year high of 85 in the fourth quarter of last year. The firm's corporate restructuring partner, Andrew Wollaston, says the first quarters of 2005 will decide whether interest rates have been raised too high and downward revisions are necessary.

Mr Wollaston says the sheer scale of the impact on consumer confidence after five interest rate rises has caught some companies "a little bit unawares".

"If profit warnings start to rise to around 100 each quarter then this indicates a reduction is needed," he writes.

Over the calendar year 2004, the number of these revised forecasts jumped by a surprising 40 per cent on the previous year to 294 warnings, despite the relatively benign economic environment. Worst hit were companies in the household goods, construction and insurance industries.

Such warnings have come from the likes of consumer products group Unilever, insurer Jardine Lloyd Thompson, estate agency Countrywide, engineering group Jarvis and supermarket chain Wm Morrison.

Mr Wollaston predicts that retail is one sector where the level of warnings is likely to rise.

"It's those companies that have a particular nexus to the spending patterns of consumers," he says. "We are starting to see a spattering of warnings from high street-related companies."

Already this year, profit warnings have come from the likes of Marks & Spencer and its food supplier Northern Foods.

Two other areas to watch are the leisure industry, travel companies in particular, and construction. "There have to be people who are cutting back in that area," Mr Wollaston says.