Economy set for late rebound

THE long-awaited economic recovery will come later and be weaker than previously thought, the Bank of England warned today.

In its quarterly Inflation Report, which sounded alarm bells over consumer debt and the housing market but gave few clues about future interest rates, the Bank said spending was expected to slow to below trend over two years despite recent buoyant High Street activity.

Boosted by strong public spending, a gradual improvement in overseas trade and a recovery in business investment, growth is expected to pick up to marginally above trend by early next year. But it will fall back over the rest of 2004, ending the year at about 2.6% compared with 2.7% forecast in the spring.

'Overall, the outlook for gross domestic product growth is similar to that expected in May, though the pick-up occurs a little later and growth is slightly lower during the second year of the projection,' the report said.

Topping the danger list is the risk that Britain's debt mountain could eventually lead to a collapse in High Street spending.

There are also fears that the longer rapid house price inflation continues, the higher the likelihood of an early Nineties-style crash. The Bank said this remained possible, but its best guess is that house price inflation will slow to zero over two years.

Bank Governor Mervyn King said debt would be monitored closely. 'High and rising debt burdens increase the vulnerability of households to adverse shocks - to incomes, for example - and raise the risk of a subsequent sharp correction to house prices and consumer spending,' he said.

'But this must be balanced against the fact that a rise in owner occupation and higher house prices, leading households to choose to take on bigger mortgages, would lead naturally to a rise in the aggregate debt-to-income ratio.'

The Bank expects inflation to slip below its 2.5% target by the end of this year as the housing market cools and oil prices ease. But the weaker pound, dearer imports and rising cost pressures will drive inflation to just above target in two years' time.