The International Monetary Fund warned yesterday that soaring UK house prices could trigger a crash as new figures underscored the two-speed nature of the economy with consumer spending racing ahead but manufacturing industry on the slide once more.
A further deterioration in the public finances also brought warnings from business groups that the Chancellor Gordon Brown may either have to raise taxes or rein in spending unless there is a sharp improvement in receipts.
The IMF cast doubt over the likelihood of this by cutting its forecast for UK economic growth to well below the levels seen by Mr Brown. The IMF said it now expected growth of just 1.7 per cent this year and 2.4 per cent next compared with the Chancellor's forecast of 2.5 to 3 per cent growth this year and 3 to 3.5 per cent next.
The IMF said soaring housing markets posed a threat in the UK, US, Australia, Ireland and the Netherlands, warning that "the risk of an abrupt unwinding cannot yet be ruled out".
Ken Rogoff, the IMF's chief economist, said that any rise on interest rates would leave households that had taken on massive amounts of debt vulnerable to falling prices and rising mortgage bills. He said the risk would be magnified by rising government debt burdens, which in turn would force long-term interest rates up higher.
However, the Governor of the Bank of England, Mervyn King, struck a more upbeat note, saying that the UK economy was recovering and adding that he saw no need to raise interest rates to dampen down consumer spending.
Mr King told MPs on the Treasury Select Committee: "So far we don't think the risk of a correction to overall spending in the economy is sufficiently large to mean that we want to slow down, deliberately slow down, the rate of consumer spending over and above the slowdown that we think is already there."
The Governor's comments came just a day after the minutes of the Monetary Policy Committee's latest meeting suggested that "an increase in interest rates might soon become necessary" because of the strength of consumer spending and the housing market. Mr King acknowledged that the increasing debt burden being taken on by consumers, funded partly by equity withdrawal from their houses, had to be monitored carefully. But he added: "That source of higher debt burden does not pose a serious risk to spending."
Figures released by the Office for National Statistics showed a surprise 0.2 per cent increase in retail sales in August, bringing the year-on-year rise to 3.8 per cent. Most economists had expected the heatwave to deter consumers from spending, leaving the figures flat, but the ONS said that the hot weather had resulted in strong sales of seaside and holiday-related goods, mainly food and drink.
Meanwhile, the Council of Mortgage Lenders said that mortgage lending hit a record £11.5bn in August, indicating that there has been no-let up in the housing boom. Much of the lending is in the form of further advances that householders are using to fund big ticket purchases.
In contrast, the latest monthly snapshot of manufacturing industry from the CBI painted a gloomy picture. It warned that order books had weakened while output was expected to remain flat over the coming quarter. A balance of 33 per cent of firms said orders were below normal compared with a balance of 24 per cent in August.
The CBI also sent a warning shot over the Chancellor's bows after figures were released showing that public sector net borrowing rose to £4.8bn in August. For the first five months of the current financial year it has reached £16.8bn - some £8.2bn higher than the same period last year.
The organisation's head of economic analysis Doug Godden said that the Government had boxed itself in by committing to such large increases in public spending. He went on to warn that unless there was an unexpected improvement in the public finances then Mr Brown would have to take "unpalatable action" - either by raising taxes or cutting spending.
The British Chambers of Commerce said that the public finances were worsening at a "worrying pace" and forecast that Mr Brown could have an £11bn "black hole" to fill this year if the deterioration continued at the same pace.Reuse content