Economy nears stagnation

LONDON (Reuters) - The economy has almost ground to a halt, the consumer spirit is evaporating and jobs are getting harder to find, surveys showed on Wednesday, as the Bank of England begins a tricky two-day interest rate meeting.

Members of the public walk past the Bank of England in central London June 3, 2008. REUTERS/Alessia Pierdomenico

Policymakers have to decide what is the best path for borrowing costs with inflation running at the highest rate since the central bank was granted the power to set rates in 1997 but with the economy looking increasingly vulnerable to recession.

The International Monetary Fund advised on Wednesday there was little scope for rate cuts because of the inflation threat but it also cut its growth forecasts for 2008 and 2009 from 1.75 percent to 1.4 percent and 1.1 percent respectively.

Analysts are unanimously forecasting rates on hold at 5 percent when the Bank announces its decision on Thursday because the latest news on the economy has been unequivocally bleak.

The economy grew at its weakest pace in more than three years in the three months to July -- just 0.1 percent, the National Institute of Economic and Social Research said.

“The outlook for growth continues to deteriorate, with recession looking increasingly unavoidable,” said James Knightley, an economist at ING.

“The consumer sector is bearing the brunt of the credit crisis with falling asset prices, negative real wage growth and rising unemployment taking its toll on sentiment and spending.”

Investors have been facing the full force of the credit crunch this year, with the FTSE-100 index of leading shares down about 1,000 points since mid-May and the pound down six cents against the dollar in the last few weeks.


The consumer mood soured last month at its sharpest rate on record to a series low, according to the Nationwide building society which has been tracking consumer confidence since 2004.

Car registrations slumped 13 percent on the year last month, the biggest fall since late-2006, according to industry data.

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And the number of Britons finding permanent jobs fell at its fastest rate since the aftermath of the 9/11 attacks in 2001, the Recruitment and Employment Confederation/KPMG said.

The risks are rising that Britain is entering its first recession since the slump of the early 1990s.

An increasingly gloomy public mood, exacerbated by rising unemployment and soaring living costs, will add to the woes of Prime Minister Gordon Brown whose Labour party looks likely to lose power at the next election due 2010.

Brown built his reputation presiding over a decade of prosperity at the helm of the finance ministry before taking over from Tony Blair last year.

A tough first year in office has seen his ratings plummet, the Conservative opposition race ahead in the polls and infighting erupt in the Labour ranks.

A quick economic turnaround would do much to improve Brown’s fortunes, but the IMF said it saw little room for economy boosting tax cuts this year and some of its directors recommended increased fiscal discipline next year.

Brown is unlikely to get much help from the Bank of England just yet either. After all, the Bank’s remit -- bestowed by Brown -- is to target inflation at 2 percent.

Inflation is already running at 3.8 percent and is expected to spike to around 5 percent. Reducing rates on Thursday could mean that inflation stays too high for too long.

While oil prices have tumbled from record highs near $150 a barrel in recent weeks, gas and electricity providers in Britain are ramping up their charges and food prices are still rising.

The British Retail Consortium said on Wednesday food prices in July were up some 9.5 percent on the year.

On the other hand, raising rates to tackle inflation could drive Britain into a nasty downturn.

“We suspect that most Monetary Policy Committee members are still firmly in ‘wait and see’ mode and in no hurry to move interest rates,” said Howard Archer, at Global Insight.

However, many expect rates will have to fall eventually, once the spike in inflation is over, to keep the economy afloat.