Consumer spending has been slowing in the UK. The housing market is starting to fall and the ou...
Consumer spending has been slowing in the UK. The housing market is starting to fall and the outlook for the manufacturing industry still remains tough. However, there are still expectations the economy is set to improve, following recovery in the US.
There is a degree of nervousness on the consumer side, according to Trevor Green, director of UK equities at Dresdner.
Consumers are not spending, following the 1% increase in national Insurance contributions and the above-inflation increases in council tax, Underground, rail and bus fares.
Green says: 'People are concerned about how pension shortfalls and increases in household taxes will have an impact on their own personal finances.'
Retail sales growth has slowed. In May, the seasonally adjusted estimate of retail sales index was 138.2. This was 0.1% below the April figure of 138.3.
Clothing retailers are finding it tough. According to Green, retailers such as Next and New Look have reported slow retail sales this year.
However, Trevor Williams, head of group economic research at Lloyds TSB, says although retail sales growth has slowed to a 2.7% annual rate in April from a 6% annual rate in December 2002, it remains consistent with around 2% annual growth in GDP.
Williams says: 'Consumer resilience has been founded on low unemployment, low interest rates, low inflation and a strong housing market. These remain in place to varying degrees, so consumer spending should remain positive and not collapse. But risks remain and are skewed to the downside.'
According to Errol Francis, director of UK equities at Barings, the housing market has been patchy since the Iraqi war.
The consumer has been an important driver of the economy and there are some issues whether or not the consumer is willing to spend. There is question on whether or not there will be an interest rate cut.
Green does not expect interest rates to move, but says there is no stimulus for people to remortgage and the slowdown is starting to be felt. Many people have taken advantage of the low interest rates and remortgaged. Property prices are expensive and it is difficult for first-time buyers to get on the property ladder.
UK mortgage lending rose only by £4.6bn in May, compared with £5.1bn the month before and UK house prices fell for a fourth consecutive month.
The manufacturing industry remains tough in the UK. The level of output was 1% lower in March 2003 than in the same period a year ago. This has also resulted in a widening of the visible trade deficit to record levels.
Green says: 'On the manufacturing front it is still tough ' the strength of the euro versus sterling is not playing through.
'The supply/demand is not there and competition from the Far East has made it harder to compete. UK companies are outsourcing to the Asia to cut costs and are only having their research bases in the UK. Investment spending is still not coming through.'
However, Francis thinks the euro has moved in favour of the UK manufacturing industry. There are expectations things will pick up in the UK, following a recovery in the US.
Williams is more positive on manufacturing for this year. He thinks stocks or inventories will add slightly to growth this year as they were cut sharply last year.
Similarly investment spending is likely to improve this year having been cut sharply last year. Government investment spending is also set to rise by over 25%.
For the UK, the overall view is that although growth will be slow the economy will remain positive. Williams projects growth to be this year about 2%. He thinks low unemployment and interest rates will support consumer confidence and spending.
'This will also be supported by the loose stance of fiscal and monetary policy, the fall in oil prices, a weaker currency and an assumption of recovery in the global economy in the second half of 2003,' says Williams.
Green is negative on GDP and expects it to come down to 1%. He says the saving grace has been the increase in government spending on infrastructure, but this is starting to slow down.
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