Two years of gloom ahead, bank warns

A LEADING City economist today warned that the High Street is set for two more years of gloom. John Butler, chief UK economist at HSBC, said consumer spending will slump to its weakest since the early Nineties recession as household debt grows, unemployment rises and the property market stagnates.

That will force the Bank of England to cut interest rates from their current level of 4.75% to 4% by the end of next year.

The warning comes a day after official figures showed Britons spent less in the shops last month than a year ago - the first annual fall since 1967. It also follows profit warnings and sales alerts from household-name retailers such as Laura Ashley, Dixons and Boots.

Mortgage figures today are expected to reinforce the view that the housing market remains subdued. 'What we have seen so far is just a dummy run,' said Butler, a former Bank of England economist. 'The outlook for next year is very weak consumption growth. The consumer is very vulnerable.'

Having driven 80% of the expansion in the economy since 1997, he expects consumer spending growth to slow dramatically from 3.2% last year to 1.7% this year, and 1.2% in 2006.

The slowdown is partly down to stagnating property values, which makes consumers increasingly reluctant to draw on the equity in their homes. Mortgage equity withdrawal slumped to less than £7bn in the fourth quarter of last year, the lowest for three years, according to Bank of England statistics.

'The main trigger has been a slowdown in the housing market sufficient to remove a lot of finance that was boosting the consumer,' Butler said. 'Less mortgage equity withdrawal means less finance available to households - so even a slowing housing-market is enough to cause a turnaround in consumer spending.'

Meanwhile, the burden of consumer debt will grow even if rates stay on hold, he said. There is already evidence that Britons are struggling to service their borrowings after five rises in interest rates in the past 18 months.

Loan write-offs and revaluations by banks reached £6bn last year, the highest since records began in 1993, and the number of repossession orders has soared.

About 70% of the jobs created since 1997 have been linked to the expansion in consumer spending and the property market, Butler estimates. That means employment will suffer as the housing market stagnates. He predicts as many as 225,000 job losses by the middle of next year.

The slowdown may force Chancellor Gordon Brown to lower his growth forecast and raise taxes. In the Budget, Brown forecast growth of as much as 3.5% this year, almost a full point higher than the Bank of England's forecast.

'What you've seen at a time of strong employment and income growth is that the consumer is very sensitive to a small shock,' Butler said. 'Imagine what the outlook will be like when unemployment picks up and taxes rise.'

Key indicators that signal trouble

Retail sales in April were 0.1% lower than a year earlier - the first annual decline since 1967.

A slew of household-name retailers, including Next, Boots, Marks & Spencer and Dixons, have reported tough conditions on the High Street.

More than 10,000 people went bankrupt in the first quarter, the highest since records began in 1960.

Banks and building societies applied to the courts for more than 25,000 repossessions in the first quarter, the highest since at least 1997.

Household debt rose above the £1 trillion mark last summer and is still rising.

The housing market has stagnated. Nationwide Building Society expects prices to rise 2% at best this year.

Only days after the collapse of MG Rover, the CBI said the first three months of the year was the worst such period for manufacturers for 18 months.

Unemployment rose for the third month in a row in April - the first time it has risen for three consecutive months since the run-up to the Iraq war.

Inflation has surged to 1.9% - its highest for seven years.

A surge in public borrowing means taxes are expected to rise next spring.