Mixed messages on economic prospects

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JUST a week after new figures showed the UK economy was emerging from recession, there are still mixed messages being sent out from the financial sector.

A survey by researchers GfK NOP released on the last day of the month showed that consumer confidence had fallen to its lowest level in six months in October.

The poll’s headline index dipped to -30, the lowest since April when the country was in the middle of an economic slump, even though analysts had forecast a steady reading of -28.

The figure contrasted with the official end of recession between July and September, when the economy grew one per cent, partly helped by the London Olympics, and shows the fragility of the country’s recovery.

However, the GfK survey was conducted between October 5 and October 14, before the Office for National Statistics published the strong growth number for the third quarter on October 25.

Nick Moon, managing director of social research at GfK, said: “The late summer boost in consumer sentiment has now faded. The government will be concerned that the economic bounce will follow a similar path and deflate during the autumn.

“People are more worried about their own financial situation over the next 12 months. This certainly doesn’t suggest there will be a spending boom on the back of the official emergence from recession,” he added.

The government and the central bank are hoping that falling inflation and rising employment will allow Britons to increase spending and support the fragile economic recovery. Britain’s retailers reported an unexpected jump in sales in October and voiced some optimism about the business prospects ahead.

That optimism was reflected in the news that lending to British consumers rose at the fastest pace in more than four-and-a-half years in September.

Although one-off factors, such as the Olympics, were partly responsible for one per cent growth in British output between July and September, data showing lending to consumers rose last month for the first time since June suggests the underlying economy is expanding at a modest rate.

Consumer credit rose by £1.199bn in September, the strongest rise since February 2008 and well above analysts’ forecasts for £0.13bn, Bank of England data showed. The upturn was driven by an £893m increase in overdrafts and loans.

Howard Archer, economist at IHS Global Insight, said borrowing might have been boosted by earlier spending on Olympic and Paralympic tickets and visits, while consumers might also be more confident due to rising employment, lower inflation and better pay growth.

“If consumers are becoming more prepared to spend... there is a real chance the economy can continue to grow,” he said.

Mortgage approvals rose to 50,024 in September, from 47,921 in August and beating forecasts for 48,500, while mortgage lending grew by £491m, also more than expected. However, monthly mortgage approvals are still running at a little over half levels seen before the 2008 financial crisis.

Mr Archer said the latest data made it less likely that the central bank would approve another round of quantitative easing asset purchases in November.

He added: “Recovery still looks likely to be gradual and bumpy.”

Economic growth in Britain will be “materially” lower in the fourth quarter, after a strong boost from the Olympic Games, and will remain weak for a couple of years, according to Bank of England chief economist Spencer Dale.

Its deputy governor Charlie Bean said there was “reason for some optimism” going forward, but that growth could be weak in the fourth quarter.

The central bank is hoping a new scheme will get credit flowing to households and business, which provides cheap funding to banks if they keep lending. But rate-setters have warned that it would be several months before the effect of the scheme, which started in August, was visible.

The Bank of England’s preferred gauge of money supply – M4 excluding intermediate other financial corporations – rose 0.3 per cent on the month after a 0.5 per cent increase in August, taking the annual growth rate to 4.2 per cent.

“The thing that really caught my eye (is) the continuing strength of M4,” said Brian Hilliard, economist at Societe Generale. “Finally, we’re beginning to see a little more perkiness in the money numbers.”