Consumer confidence sinks to lowest level in five years

Britons' confidence in the economy has collapsed to its lowest level for almost five years in the face of mounting speculation of a war with Iraq.

An index of consumer sentiment this month dropped to its most pessimistic level since October 1998, when the world was in the grip of a global financial crisis.

Martin Hamblin GfK, the research firm, said: "The ever-increasing threat of war with Iraq is the key contributor to the sheer drop in confidence this month, with concerns about the UK stock market contributing to a lesser degree."

The drop follows a dramatic plunge in confidence among Americans and will fuel fears that mounting uncertainty could sink hopes of an economic recovery. The figures yesterday added to speculation that the Bank of England will cut interest rates again ­ maybe as soon as next week ­ to bolster confidence.

Jonathan Loynes, the chief UK economist at Capital Economics, noted: "The last time confidence dropped like this, in 1988, the MPC cut rates five times in a row."

Marian Bell, a member of the Bank's Monetary Policy Committee, yesterday said there was room for further "fairly significant" rate cuts to keep the economy on track. She told The Herald in Glasgow: "I think that will happen if it is needed to keep growth growing in line with potential [and] keep inflation at target." The GfK survey showed that consumers were growing increasingly worried about the path for the economy and their own finances.

More than half of the 2,000 people surveyed said the situation had worsened over the past 12 months while a similar amount believed it would continue to deteriorate. A third said they were less likely to make major purchases over the coming year. Expectations for the future of their finances fell to a 15-month low.

John Butler, at HSBC, said: "It is questions about their own personal situation that matter for consumer spending and for the first time there are some cracks appearing. The survey again raises the risk that the MPC cuts interest rates in the next few months, although next week seems very unlikely."