Surge in consumer credit leaves rates move in the balance
Saturday 31 January 1998
Consumers took out new loans amounting to pounds 1.3bn in December, the largest monthly increase ever recorded.
This huge appetite for borrowing came as a surprise as earlier figures had showed weak retail sales last month. Economists speculated that sales had actually been boosted by special offers in the sales towards the end of the month, suggesting there could be a rebound in official figures for high street activity in January.
Comments from the department store group John Lewis lent weight to this theory. Its weekly sales report said there had been "a useful result" last week, with sales up 7 per cent year-on-year in what was normally one of its quietest trading periods.
This buoyant picture was supported by other pieces of evidence yesterday.
The Nationwide building society said its house price index had risen by 1.2 per cent in January, taking the annual rate to 13.1 per cent, the highest since 1989. Although it claimed the housing market was faltering, the January increase was the highest since September and offered little comfort to anybody looking for clear signs of the economy turning down.
Paul Sanderson, head of research at the Nationwide, said the underlying trend was for house price inflation to slow. "The number of new mortgage approvals, which gives a good indication of future transactions, shows little sign of pick-up," he said.
House price figures due soon from the Halifax are likely to show a smaller increase in January. Spokesman Gary Marsh said its index had shown house price rises had been steady for some time.
Separate Bank of England figures yesterday showed that mortgage lending rose after a weak November, reaching nearly pounds 2bn compared with pounds 1.7bn the same month a year earlier. The annual growth in home loans has been stable for the past six months.
Michael Coogan, director general of the Council of Mortgage Lenders, said: "The mortgage market in 1998 seems firmly set on a course of sustainable but unspectacular growth.
The Bank also revised up its preliminary estimate for growth of M4, the broad money supply measure, from 11.2 per cent to 11.8 per cent in the year to December. "Both this and earnings growth continue to be danger signals for the Monetary Policy Committee," said James Barty, an economist at Deutsche Bank.
Yesterday's batch of figures suggested scant sign of slower growth in consumer spending. With the service industries and consumer sector still strong but manufacturing and trade in goods hitting the doldrums, City analysts hedged their bets by saying next week's decision by the Bank's Monetary Policy Committee was finely balanced.
David Hillier of Barclays Capital, one of the few who thinks that balance will tip in favour of an interest rate increases, said: "I would not be surprised if this was the MPC meeting which finally saw a split vote."
US President Bill Clinton presided over the fastest economic growth last year since Ronald Reagan was in the White House, while inflation was at its lowest level since the days of Lyndon Johnson.
America's GDP expanded by an annual rate of 4.3 per cent in the final quarter, and 3.8 per cent in 1997 as a whole. This was the biggest increase in national output since 1988. Yet prices climbed by just 2 per cent, and only 1.5 per cent in the final quarter, the best inflation performance since 1965.
Strong consumer spending and a big improvement in the growth of export volumes lay behind last year's vigorous growth. But the contribution from trade to growth is likely to be much weaker this year, partly as a result of the Asian economic crisis.
Investment spending, which was very buoyant earlier in 1997, tailed off sharply. It fell by 3.6 per cent in the final quarter.
Alan Greenspan, Federal Reserve chairman, said the economy had been "exceptionally healthy". But, like most other experts, he predicted a slowdown this year. "Such a moderation would be helpful at this juncture," he added.
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