UK economic fears

Confidence in the UK economy has deteriorated over the past few weeks, primarily because of fears over consumer spending trends. Retail sales recorded a slight monthly increase for May, but the annual increase still slowed to a six-year low below 2.0 percent. Consumer confidence surveys have suggested a further deterioration over the past few weeks, and there will be concerns spending could weaken even further, especially if the terrorism attacks hurt domestic confidence.

House-price data has been volatile, but there has been a clear and sharp slowdown, and prices are (at best) broadly static with the annual growth rate now close to zero.

Consumer spending has been supported by rising house prices over the past three to four years, as consumers have been happy to increase debt levels and maintain high spending on the back of appreciating housing assets. As asset inflation slows or reverses, there will be a much greater reluctance to increase debt and spending. The implications could be very serious, especially as household debt levels are already at historically unprecedented levels of around 140 percent of disposable income.

Unemployment has risen for the past five months and there will be fears that, given the high debt levels, only a small increase in unemployment could trigger a big shift in spending patterns.

These fears will be eased slightly by the recent decline in long-term interest rates as this will curb the increase in mortgage payments.

Some caution is required, as the recent spending and confidence data may have been distorted by the terrorist attacks and faulty seasonal adjustment.