Bank of England worried over economic slowdown

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Rachel Lomax, the deputy governor of the Bank of England for Monetary Policy, said last night there are "signs" that credit conditions facing both firms and households have already tightened and may tighten further, in an indication that policymakers are growing worried by the possibility of a housing crash.

"This should act as a brake on consumer spending and investment. But the size of this effect is highly uncertain ... and much may depend on whether recent developments shake consumers' confidence in future income growth and employment – and so far that does not seem to have happened," she said.

However, she added that "we need to be very alert to the risk that the economy may be slowing too abruptly. At current interest rate levels, monetary policy may be on the restrictive side. And the duration and impact of financial turbulence is very hard to call. There must be a risk that at some stage it will spill over into asset and property markets more generally, and trigger a damaging lack of confidence". She also warned of a combination of such a slowdown in economic growth with higher inflation, the so-called "slowflation" or "stagflation" dreaded by observers.

Ms Lomax's remarks came as data from the Office of National Statistics showed that business investment was essentially flat in the third quarter. Surveys from the CBI and the Bank of England's regional agents confirm a more subdued mood among businesses about future prospects.

Howard Archer of Global Insight said: "We suspect that softer business investment will be a factor causing UK GDP growth to slow to 1.9 per cent in 2008 from an estimated 3.1 per cent in 2007. Evidence of weakening investment intentions also boosts the case for a December interest rate cut by the Bank of England."

Industry may be encouraged by a more supportive tone from the Government. The Business Secretary, John Hutton, announced a new manufacturing strategy, whereby the Government proposes to help industry take advantage of opportunities presented by tackling climate change. "There are many new and exciting technologies for the UK to take advantage of, including on and offshore wind power, biomass and micro-generation".

But the trade union Unite said: "Unless workers are given the same protection as those in other parts of Europe, they will remain first in line when global companies seek to make job cuts."

Andrew Reynolds Smith, chairman of the CBI Manufacturing Council, said: "Businesses that manufacture are far stronger than most people realise. But the sector faces complex challenges in the global economy, so today's pledge of a greater commitment by Government is essential."