Stagnation fears as economy slows

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The Independent Online
DIANE COYLE

Economics Correspondent

Evidence that the economy is slowing piled up yesterday, bringing warnings of the danger of stagnation. Robin Geldard, president of the British Chambers of Commerce, said: "Economic activity appears to be delicately poised between sustainable growth that is much desired and a lower stagnant level of growth, which is not."

He warned that higher interest rates could tip the economy over the brink. The BCC's latest quarterly business survey found that confidence fell in the second quarter and investment slowed.

One of the Treasury's panel of independent experts, Professor Patrick Minford of Liverpool University, said there was a "serious need" for an immediate half-point cut in base rates. City economist Ian Shepherdson at HSBC Markets said: "Higher base rates would be suicidal for the Government."

Paul Mortimer-Lee, chief economist at Paribas, said there was still a case for raising interest rates to revive the pound and put the lid on imported inflationary pressure, but in that case tax cuts were needed.

Today's second-quarter GDP figures will be one of the most important indicators for the Chancellor's interest rate judgement when he meets the Governor of the Bank of England on 27 July.

All indications are growth will have been significantly lower than in the first quarter.

The latest indicator was a sharp fall in bank lending in June, to pounds 1.7bn. Although much of the pounds 3.8bn decline was due to repayment by Glaxo of its bank borrowing for the Wellcome takeover, consumer and housing loans also slowed.

A complete breakdown of the lending figures is not yet available, but mortgage borrowing clearly remained subdued last month. Net new advances by the building societies amounted to pounds 1.3bn, up on the month because of the normal seasonal increase but also a little higher than last June.

Adrian Coles, director general of the Building Societies Association, said building societies were gaining market share. However, the number of new commitments, an indicator of future lending, was flat last month at 47,000 and well below last June's 60,000 new loan offers.

The British Bankers' Association reported that its members made mortgage loans of pounds 476m, slightly up on May's pounds 432m. However, the banks' mortgage lending has been on a strong downward trend since last November.

The big banks also reported an unusual repayment of credit card loans last month. Customers repaid pounds 16m, after borrowing pounds 189m extra in May and an average of pounds 111m in the past six months.

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