Fears were mounting that Britain may be slipping towards recession much faster than anticipated, as a string of new data painted a bleak picture of the state of the UK economy.
Consumer confidence fell to a 15-year low in March, according to a survey by GfK NOP, while the Nationwide house price index recorded its fifth consecutive monthly fall. Nationwide said property prices have now fallen 1.5 per cent over the past three months, and are expected to continue dropping over the months ahead.
Elsewhere, the pound hit another all-time low against the euro, as currency traders priced in the increased likelihood of an imminent cut in the Bank of England base rate. Meanwhile the Office of National Statistics (ONS) cut the annual rate of GDP growth in 2007 from 2.9 to 2.8 per cent, the lowest level since mid-2006, and also reported that the savings ratio had fallen to its lowest level since 1959 last year.
Finally, the ONS said the current account deficit for 2007 came in at 4.2 per cent of GDP – the highest level since 1989 – although it did see some recovery in the fourth quarter of the year.
Lehman Brothers, the US investment bank, said the chances of the UK falling into recession over the next two years were one in three, predicting that the Bank of England will be forced to cut interest rates as many as five times over the coming months, to try to stimulate the economy.
However, Howard Archer, the chief UK economist at Global Insight, said that while he believed the UK was set for a severe slowdown, it may still just avoid recession. "The further drop in consumer confidence to a 15-year low in March does not bode at all well for consumer spending," he said. "While there is not always a close relationship between consumer confidence and actual spending, it does seem highly likely that consumption will be dampened over the coming months by muted real disposable income growth, tighter lending conditions, a substantially softer housing market, lower equity prices and increased debt levels. We believe the UK is set for an extended period of markedly below-trend economic growth, although we remain hopeful that it will avoid recession."
Mr Archer added that he believed the Bank of England's monetary policy committee (MPC) would now elect to cut interest rates by 0.25 percentage points to 5 per cent, possibly as early as next month's meeting on 9-10 April. However, Fionnuala Earley, Nationwide's chief economist, said the high levels of inflation will make the MPC's decision much harder. "On the one hand, inflation remains stubbornly high," she said. "On the other hand, the likelihood of a US recession is increasing and UK consumer confidence and credit conditions have weakened.
"Although retail sales are surprisingly strong, it seems highly unlikely that this will continue. So, with consumers likely to spend less and a greater reluctance on the part of banks to lend in the current environment, at least some of this inflationary pressure will be dampened."
Nationwide said house prices are now up just 1.1 per cent year on year, their lowest level of growth since March 1996. During 2008, the building society believes they will be broadly flat, or down slightly. But Mr Archer predicts a 5 per cent fall for the year, while Lehman Brothers are forecasting an even greater drop of 8 per cent for the year.
Although unemployment and interest rates remain low, house prices are being dragged down by the credit crunch, as the banks become increasingly reluctant to lend to homebuyers. This week, Nationwide and First Direct became the latest major lenders to pull a number of their popular mortgages from the market.Reuse content