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Business News

Economy still sluggish and future looks gloomy

Activity in the service sector – comprising some 70 per cent of the economy – dropped sharply in April, the Office for National Statistics reported yesterday. Coupled with fresh, subdued readings on consumer confidence and bank lending, economists said that growth may be slowing even from the sluggish pace it displayed in the first few months of the year.

In an ominous, but unsurprising, sign of further trouble to come, eurozone consumer sentiment fell again in June, the fourth month in a row to show a deterioration.

The Royal Wedding and extended bank holidays in April helped depress service sector activity by 1.2 per cent in April, more than cancelling out the 0.8 per cent rise in March. But such special factors meant the figures were widely discounted by analysts.

Nonetheless, from what can be gleaned about the underlying trends, the pace of recovery does appear to be slowing, with a growing disparity between realty and official forecasts. The Gfk/NOP consumer sentiment index showed another fall in June, wiping out most of the brief euphoria surrounding the Royal Wedding and leaving consumer confidence at its lowest since 2009.

The Bank of England said that mortgage approvals were virtually flat again last month, at 45,940 in May, slightly down from the previous six-month average of 45,957 and less than half typical pre-recession levels and those required for a healthy market. Consumer lending was up a little, possibly down to households borrowing to maintain living standards. There was little overall movement in the rates charged for most credit.

The Governor of the Bank, Sir Mervyn King, has in recent weeks stressed the importance of the effective interest rates paid by consumers and businesses in setting the Bank rate.

If, for example, those market rates moved sharply lower then, other things being equal, the Monetary Policy Committee might choose to raise the Bank rate to compensate for this simply to maintain the existing "stance" of policy. This might happen if money markets loosened up or there was greater competition, for example.

But there is no single notional rate that the Bank targets, and the various rates sometimes move in different directions, and sometimes because of technical factors. Thus in May the price of the new unsecured lending jumped by 48 basis points to just over 7 per cent, but this may have been to do with consumers taking on longer-term debt, rather than reflecting any significant change in underlying credit conditions.

Other market rates, as since the start of 2009, barely shifted. Given events in the eurozone and fears of a "second credit crunch", there seems little prospect that the commercial banks will see much easing in their ability to raise short-term funding.

More encouragingly, UK productivity edged up 0.1 per cent in the first quarter, though the disappointing recovery in this key indicator of economic vitality continues to trouble policymakers.

Scott Corfe, an economist at the analysts CEBR, said: "Access to credit remains considerably tighter than prior to the recession. Squeezed incomes and tight lending are leading to pain on the high street."