Are we heading for a fall? The evidence

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The Independent Online

HOUSING

HOUSING

WHERE ARE WE AT?

House prices, after a 10-year boom, have hardly moved since the start of the year. Prices have not fallen but the number of sales has fallen by one-third compared to a year ago.

BEST CASE

The hope is that the current situation will continue. Prices are far too high relative to households' incomes and the most benign outlook is five or 10 years of low growth until it returns to balance.

WORST CASE

The market is on a knife-edge and could easily tip into a slump. If the economy slows and people start losing their jobs, it could spark a sudden rush to sell up, which could build into a vicious cycle.

GOVERNMENT SAYS

Repossessions remain close to record lows and the latest indicators point to an emerging gradual pick-up in activity.

OUR VERDICT

The housing boom is over. The most likely forecast is for meagre growth. With employment at record levels and little sign of job losses, there is no sign of a trigger to produce a Nineties-style crash.

HIGH STREET

WHERE ARE WE AT?

Retailers suffered their worst Christmas for three, 13 or 28 years, depending on which survey you look at. In any event, the outlook is bleak and several famous names have issued profits warnings.

BEST CASE

The industry hopes this is a blip after the five interest-rate rises (a 40 per cent increase) between November 2003 and August 2004. With rates on hold or heading down, confidence should return.

WORST CASE

This could be just the beginning of the end. Rising rates and a debt mountain have hit shoppers' pockets. On top of that, worries over pensions and likely tax rises mean there is little hope of an upturn.

GOVERNMENT SAYS

Retail sector is just a third of total household spending. The historical pattern is for other consumer spending to rise as retail sales fall. The Treasury believes there is no need to panic.

OUR VERDICT

Confidence among households is above its long-run average and so long as employment stays strong, people will continue to spend - just at slower rates than we have seen over the past decade.

EMPLOYMENT

WHERE ARE WE AT?

There are a record number in work, and unemployment at its lowest for 30 years. But the latest figures have shown a rise in both measures of the jobless total. The public sector is the economy's main job creator.

BEST CASE

Surveys show that employers still need workers, albeit fewer than a few months ago. A gentle decline in employment would not be the end of the world, as it would ease the path to lower rates.

WORST CASE

If consumers stop spending, businesses will have to make cuts. They have already cut profit margins and sought cheaper supplies - the only thing left is the workforce. It then becomes a vicious cycle of cuts.

GOVERNMENT SAYS

The Bank of England says private-sector employment will probably recover while the Government's spending plans are consistent with extra recruitment.

OUR VERDICT

The success of the labour market is due to the flexibility brought about by reforms. Continued growth in the economy will lead to further job creation - although not in the retail sector.

MANUFACTURING

WHERE ARE WE AT?

Factory output in March suffered its worst fall for a decade. The UK has three strong sectors that prop up the rest - drugs, food and drink and transport. In March, the pharmaceutical sector took a dive.

BEST CASE

Manufacturing figures are volatile and this may be a blip thanks to one-off factors such as the high price of oil and the slump on the Continent. When these pass, highly efficient UK factories are poised to recover.

WORST CASE

UK manufacturing has fallen 3 per cent over the past two years while in the US, Japan and Germany it has grown by between 5 and 10 per cent, pointing to a long-term problem in Britain.

GOVERNMENT SAYS

Going forward, the pick-up in manufacturing at the start of the year is expected to gather momentum. Private surveys point to better times ahead.

OUR VERDICT

UK factories went through much pain in the eight years of the strong pound and came out stronger. But the depth of Europe's downturn, the UK's biggest export market, raises long-term questions.

PUBLIC FINANCE/TAX

WHERE ARE WE AT?

Government borrowing for the latest tax year came close to the Treasury's forecast of £34.2bn. Mr Brown was able to point to a sharp rise in corporation tax revenues and controlled public spending.

BEST CASE

There is a revival in fortunes in the City of London which triggers a 13 per cent surge in corporation tax receipts to record levels, boosting the tax take by £25bn by 2008.

WORST CASE

The economic slowdown and an end to the consumer spending boom means tax revenues undershoot the target. Taxes rise by £13bn a year, equivalent to 4p on the basic rate of income tax.

GOVERNMENT SAYS

With our debt lower than our competitors' and lower than a decade ago, we are meeting both our fiscal rules, both in this economic cycle and the next.

OUR VERDICT

Mr Brown admits he has a margin of just £6bn to meet his "golden rule" to balance the books over the cycle. He will meet it in this cycle but will almost certainly need to raise taxes during this parliament.

INFLATION/INTEREST RATES

WHERE ARE WE AT?

The measure the Bank targets has risen from 1.1 per cent last August to 1.9 per cent in March, just below the government target. Oil price rises and further growth point to it going above 2 per cent in 2008.

BEST CASE

Inflation at 2 per cent would have been unthinkable even 10 years ago. The Bank of England has shown it is up to any challenge thrown at it and will keep inflation close to target.

WORST CASE

The UK moves towards stagflation - high inflation and low growth - that forces the Bank to raise rates even as businesses are calling for lower borrowing costs.

GOVERNMENT SAYS

The credibility of the Government's monetary policy framework is expected to contribute in returning inflation to target through anchoring inflation expectations.

OUR VERDICT

Growth, not inflation will be the problem for the Bank. The UK has survived an oil price surge, from $30 to $55 a barrel in a year. The Bank will need to explain why it is cutting rates as inflation is rising.

HOUSEHOLD DEBT

WHERE ARE WE AT?

Personal debt - mortgages, credit cards and the rest - is at record levels and stands above £1trn. But there are signs that the growth is slowing, especially in people borrowing against their home.

BEST CASE

As with the housing market, the hope is that unsustainable levels of annual growth in borrowing will continue to slow without the need for a sharp slump.

WORST CASE

Rising interest rates have reminded households of the burden of debt. That, combined with worries over pensions and tax rises, will encourage a rush to pay off debt and build up savings, triggering a further slump in spending.

GOVERNMENT SAYS

Growth in household debt has continued to ease, suggesting that households are adjusting to the effects of strong rises in borrowing.

OUR VERDICT

Consumers cannot keep increasing debt at three times the pace that their incomes grow. The pensions crisis has reminded people they need to plan for the future. There is a real risk this will trigger a further sharp slump in spending

SERVICES

WHERE ARE WE AT?

It never gets the headlines but the service sector, which makes up two-thirds of the economy, continues to drive growth. IT has slowed over the past year but is still the fastest-growing sector.

BEST CASE

Businesses that cover everything from courier vans to global accountants will continue to grow as the economy grows. The problems with manufacturing do not reflect a wider malaise.

WORST CASE

As households cut spending, it triggers a knock-on effect as companies cut back on supplies. Falling demand combined with rising prices of raw materials and wages forces companies to cut jobs.

GOVERNMENT SAYS

Service sector output grew strongly in 2004. Business services and finance and transport, storage and communications have seen particularly robust growth of late.

OUR VERDICT

It will be a tale of two halves. Consumer-focused businesses will feel the worst of the downturn. But professional services companies will benefit from government spending and overseas demand for services.

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