Sluggish UK economy to force interest rate cut - study

The UK’s sluggish economic growth looks set to last until the autumn of 2003, a report predicted today.

The BDO Business Trends Report said the “lacklustre outlook” for growth meant it would only be a matter of months before interest rates were reduced, with a cut likely to happen in the spring.

It added that the latest surge in house prices was likely to stop the Bank of England’s Monetary policy Committee from reducing rates when they begin their meeting on Wednesday.

Peter Hemington, partner at business advisers BDO Stoy Hayward, said: “The economy is looking drab and disappointing at present, and the gloom is set to continue well into 2003.

“The Bank of England had a chance to cut interest rates in October and November but was dissuaded by the soaring housing market.

“With inflation well in check, we believe it will be February or March 2003 when the MPC next takes decisive action to cut rates to boost the UK economy.”

The group’s report is based on the results of the UK’s main business surveys between October 29 and November 26.

It said the BDO Optimism Index, which is a strong indicator of GDP growth two quarters ahead, remained constant at 97.9 for the second month running, despite a slight dip in confidence among smaller firms.

The index implies that businesses can expect economic growth of just 1.2% during the middle months of 2003.

The group said worries about a potential conflict with Iraq led to a reduction in customer orders in world markets, which caused the BDO Output Index to fall by 0.1 for the third month in a row to reach 99.6, implying economic growth of 1.9% until the spring.

It added that while orders improved for small firms and the service sector last month, manufacturers and large firms felt the brunt of slowdowns in both the US and Europe.

A survey also published today by the Confederation of British Industry and financial services group Grant Thornton found that signs of a pick-up in the service sector had failed to dispel uncertainty about the economic recovery.

The quarterly survey, which looks at service firms ranging from advertising agencies to hotels and restaurants, found that business and professional service firms saw a pick up in the value and volume of business during the past three months, although both remained significantly below normal.

It added that profits at the firms fell further during the period, but this decline is expected to end in the next three months, as prices, which also continued to fall, are expected to stay flat.

Consumer services firms reported only a slight pick up in the volume of business following a decline for the past six quarters, but this shift failed to feed through to confidence which slumped significantly.

Overall profitability in the sector rose unexpectedly for the first time since November 2000 driven by hotels, bars and restaurants, but firms still expect the rate of profit growth to slow over the coming three months.