UK economy to be 'too dependent on household spending'

UK house prices will slump 20% from their peak, spending will fall and interest rates will be slashed to 3.5%, a forecaster has predicted.

Roger Bootle, economic adviser to accountancy firm Deloitte & Touche, says with the global economy likely to remain weak, the UK economy would be "dangerously over-dependent on household spending".

In his review assessing the prospects for the UK over the next couple of years, he added: "The catalyst for a sharp slowdown in spending growth could well be the bursting of the bubble in the housing market."

He is expecting house prices to fall by 20% from their peak - or 10% from their current levels - to reach a trough sometime in mid 2005.

Under his predictions prices will rise by 20% this year, but fall 5% in 2004 and a further 10% in 2005. The tumble will, however, be less than the 30% fall seen in the late 80s-early 90s.

The blow should be cushioned to some extent by a fall in interest rates to 3.5% from the current 4%, he says.

Mr Bootle added: "We do not believe that the UK will fall into recession. Slower growth in household spending will eventually be offset by a recovery in exports and investment, as well as stronger government spending."