London's growth slowing down

FRESH signs that the Bank of England was right to leave interest rates unchanged this month came today as a new report showed the gloss may already be coming off London's economic revival.

Fears of a dramatic slowdown in the capital's housing market have pushed London from top spot in an influential regional growth league table to seventh since the turn of the year.

The Royal Bank of Scotland PMI research shows growth in the capital has suffered from a 'distinct easing' in consumer demand for goods and services compared with the rest of the UK.

RBS chief economist Jeremy Peat said: 'All the regions in the UK are still growing strongly but the slowdown in London is notable. It has gone from top of the tree to the second half of the division.'

Peat said the 'past excesses' in London's housing market meant it was more vulnerable to rate rises made so far this year and consumers were tightening their belts.

The Bank of England's monetary policy committee left the cost of borrowing at 4.5% last week after back-to-back increases in May and June.

City experts believe rampant house price inflation is beginning to cool as a result of the action already taken by the nine-strong panel, led by Bank Governor Mervyn King.

Andrew Potter, economist at NTC Research, the company RBS commissioned to carry out the study, said the MPC's decision to keep rates on hold at 4.5% 'seemed prudent'.

London scored 57.2 on the RBS Business Activity barometer last month, slightly up on 57.0 posted in May but far below the 62.2 peak of last November. Any measure above 50 reflects growth.

June's rating puts London at 57.1 for the second quarter of the year, seventh behind the South West, which had the biggest rise with 59.6. The North East is 12th and bottom of the table with a score of 53.8 but Peat said the use of a north-south divide to explain the relative trends was 'too simplistic'.

He added: 'Many factors are affecting economic growth in the UK at the moment, including interest rates, house prices, oil prices and the performance of the global economy. Growth is becoming more balanced, with regions which were seeing consumer-driven growth late last year now showing the first signs of slower growth, as house price inflation begins to moderate.'

The City will get a fresh insight into whether inflationary pressures are building in the economy when the Consumer Price Index for June is released tomorrow.

Economists believe the figures will show only a modest pick-up in the underlying inflation rate from 1.5% to 1.6% despite a jump in petrol prices on the back of spiralling cost of crude oil.

Producer price figures due out today were expected to show the growth in firms' input prices fell back slightly last month after a 1.6% rise in May, the biggest of the year so far.

Philip Shaw, chief economist at Investec, said: 'All in all, we expect input prices to have declined by 0.8% in June, taking the annual rate back to 4.1%.'