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'Bumpier ride' ahead for UK economy

Should the Chancellor of the Exchequer become the next Prime Minister, as is widely anticipated, his first few years will be a “much bumpier ride than any central forecast can show.”

The ominous verdict is not from Blairite critics but from David Miles, chief UK economist at Morgan Stanley, who reviewed the mortgage market in 2003 at Gordon Brown’s behest.

Far from a honeymoon period, the City forecaster said Mr Brown’s initial years would be mired by high inflation and a possible property market crash, The Daily Telegraph reported .

Not only would economic growth fall short of the Treasury's forecast, but debt would also continue to plague the country, amid low levels of high street spending as consumers’ budgets tighten.

“Even without interest rate rises, house prices look vulnerable,” Mr Miles reportedly said.

“However, we are not convinced that failing house prices themselves [although] likely at some point, need trigger a sharp slowdown in consumer spending.

“Risks of – among other things – stronger-than expected inflation, risks to the housing market and the potential for slower consumer spending mean that 2007/08 could be a much bumpier ride than any central forecast can show.”

Analysts at Market Oracle support the bleak outlook, in part, by saying they expect the BoE to raise interest rates to 5.5%, according to the group’s forecast for 2007 issued in December.

“Thus economic growth is expected to slow and unemployment [to] also rise,” the group said in a statement.

“These will undoubtedly have an impact on the UK housing market and thus should slow during 2007.

“Whether it will actually go negative during 2007 is hard to say, since it has failed to go negative for each of the last three years!

“Also the strong Buy-to-let market continues to support the housing market, as more people look for investment opportunities, though on the negative side, higher council tax bills will put some dampeners on the property market.”

Last month, accountants KPMG said “too many people have debts that they have no realistic hope of repaying”, in light of creditors having to write off a record £1.4bn in bad debts.

Economist Grant Thornton says higher debt levels leave households vulnerable to unexpected falls in income, while high levels of variable borrowings also expose borrowers to increases in interest rates.

Yet only one economist out of 50 polled this week by Reuters thinks the Bank of England’s Monetary Policy Committee will conclude Thursday’s meeting with a further hike to interest rates.

However 21 out of the 50 expect rates will have risen to 5.25%by the end of March, according to the Financial Times, which obtained results of the poll.

Meanwhile Mr Miles, of Morgan Stanley, believes perceptions that the UK economy would not falter is one reason behind the “rapid rise in household debt”

Perhaps, he added, this may also explain “government willingness to run deficits on a scale not normally associated with periods of extended healthy growth.”

He warned: “The UK economy may now be less able to weather an economic storm than a couple of years ago.”

Jan 11, 2007
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