Britain defies economic gloom

UK housing market and consumer spending remain buoyant but the American recovery is faltering

A SPATE of data yesterday confounded gloom-mongers about the economy, painting a more upbeat picture than expected about the continuing strength of the housing market and consumers' enthusiasm to spend money.

A spate of data yesterday confounded gloom-mongers about the economy, painting a more upbeat picture than expected about the continuing strength of the housing market and consumers' enthusiasm to spend money.

House prices continued to grow steadily in January, rising 1.7 per cent during the month, according to the Nationwide Building Society's latest survey.

The rise in January was just behind the 1.8 per cent average increase recorded in the preceding three months. It meant that average annual house price inflation continued to grow at 26.5 per cent – lower than the peaks seen last summer when prices were rising at 33 per cent but reflecting more modest growth in prices this time last year.

Dismissing talk of a housing crash, the Nationwide said that the outlook for the market remained good – with average inflation staying at about 25 per cent for the next couple of months – even in the face of potential conflict in Iraq.

Data from the Bank of England showed that the robustness of the housing market was accompanied by strong spending. The Bank said total lending, including mortgages and unsecured loans, rose by £9.4bn in December, the highest monthly increase since records began in 1993. The increase represented a 13.6 per cent jump on an annual basis. Consumer credit accounted for £1.9bn of that amount, stronger than the £1.6bn analysts had expected.

The raft of upbeat statistics came as the stock market made another cautious foray into positive territory, after ending a record-breaking 11 days of successive losses earlier this week.

Individuals nevertheless appeared to be increasingly anxious about the global economy due to the prospect of a war with Iraq and slumping stock markets, according to the latest survey by GfK, a research company. GfK said its consumer confidence index jumped only one point to minus 3 in January. It hit minus 4 in December, its lowest point since October 2001. Economists had predicted a rise to minus 2 in the scale.

But analysts pointed to evidence in the survey that consumers were much more sanguine about their own financial situations.

John Butler, an economist at HSBC, said: "The response to questions about how people feel about their own situation was strong. What that shows and the figures on borrowing from the Bank of England is that what would affect spending is either an increase in interest rates or the risk of more unemployment."

Separately, data from the main organisation representing retailers and from the economic forecasting body, the National Institute of Economic and Social Research (NIESR), showed consumers have been more determined to spend money than many had predicted.

The British Retail Consortium (BRC) saw a slight uptick in its index measuring demand on the high street. The Retail Confidence Indicator notched up to 38.6 in January compared with 38.3 in December.

However, the BRC was keen to downplay the improvement. Bill Moyes, the director general, said: "The sales trend remains downwards. These figures only serve to reinforce our view that the next move in interest rates should be down."

The NIESR said consumption remained strong, if slightly down on last year. It forecast consumer spending growth of 3.2 per cent this year compared with 3.7 per cent last year.

But the think-tank warned spending could not continue at current levels. Professor Ray Barrell of the NIESR said: "People have been saving about 10 per cent of their income. That has now come down to 5 to 6 per cent. It needs to return to 10 per cent at some point."

The organisation said that while UK consumers were still proving resilient, the continuing weakening of the global economy would undermine the country's growth. It downgraded its GDP estimates, predicting the UK economy would grow by 2.2 per cent this year, compared with its estimate in October of 2.5 per cent. It believes the economy will expand by 2.4 per cent next year.

It added that the Chancellor would be unlikely to meet his target of bringing the Budget back into the black to the tune of £5bn by 2006 to 2007. The NIESR estimates there will actually be a deficit of £35bn.

The European Commission yesterday also warned that Gordon Brown's forecasts of 2.75 per cent growth next year could be overoptismistic, and predicted Britain could come close to breaching EU rules that require members to keep budget deficits at less than 3 per cent of GDP.

But Pedro Solbes, the European Commissioner for economic and monetary affairs, declined to call for spending cuts in the UK and took pains to point out that the rise in the deficit "is due, to a large degree, to the welcome reversal of the historic decline of net public investment relative to GDP". He added that UK public finances are "overall judged to be in a sound position".