There is still too much complacency regarding the UK’s economy, with recent forecasts increasingly looking like wishful thinking, according to Deloitte & Touche‘s latest Economic Review.
Official and market forecasts that predict a steady acceleration in growth of the next few years rely on a ‘gradual and orderly’ unwinding of the imbalances built up in the last five, says the review. The group’s economic advisor, Roger Bootle, warns that “such a benign scenario” is now looking more and more optimistic.
“With the global economy likely to remain weak, the UK economy will be dangerously over-dependent on household spending as the sole source of upward momentum. Yet there is a clear limit to how much longer consumer spending can continue to outpace the overall economy,” he says in the report.
House prices to fall? A sharp slowdown in consumer spending could come when the housing market bubble bursts; this is now considered almost inevitable in the near-future and is already somewhat overdue. “Although house price inflation has recently continued to accelerate, this has made the various measures of value look even more over-stretched and hence made an abrupt correction at some point even more likely,” says Bootle.
Deloitte expects house prices to fall 20% below their peak. Historically, such a fall in house prices has always been accompanied by a full-blown recession in the broader economy; this time there may be a degree of cushioning from a fall in interest rates to 3.5%, says the bank.
The report says that the impact of this adverse environment on consumer spending will be strongly negative. After growth of 2.5% in 2003, it now expects consumer spending to fall in 2004, for the first time since 1991. It is likely that if consumer spending falls, and the economy with it, advertising too will take a downturn. This is the double-dip scenario predicted by some for a while now (see UK Advertising Forecasts From Initiative Media).
Despite these indicators, a full recession is not anticipated, as slower growth in household spending will eventually be offset by a recovery in exports and investment, as well as stronger government spending. Nonetheless, overall economic growth will remain weak at just 1.75% in 2003 and 2.25% in 2004, considerably below consensus forecasts, according to Deloitte.
