LONDON (AFX) - Bank of England deputy governor David Clementi said there are downside risks to consumer demand in the UK, although there is still no evidence of steep cutbacks in consumer spending. "So far this year, the UK economy has fared rather better than its main trading partners. But, even given these factors, consumption growth has been strikingly strong. There are, of course, downside risks to the outlook for consumption in the UK," he said in his address titled the 'Bank of England's role in monetary and financial stability' at the APCIMS annual conference here today.
He noted that UK consumer confidence had fallen in September, even before the terrorist attacks on the US. In addition, despite the recent rally, equity prices remain far lower than their peaks eighteen months or so ago, leading to reduced consumers' financial wealth. "And there may be the first sign of easing in the labour market which, if it persists, will reduce disposable incomes," he added. However, there is little sign yet of any sharp reduction in consumer spending, he said, citing retail sales volumes which grew by an annual rate of 5.9 pct in September.
That picture of continued strength is corroborated by the CBI Distributive Trades Survey measure for September which was gathered largely after the 11 September attacks. In addition, the British Retail Consortium survey suggested that sales volumes by the end of September had returned to pre-attack levels, he said.
"I focus on the continuing strength of consumption because it 'together with its partial correlate on the output side, the retail service sector ' is absolutely key to understanding why UK interest rates have fallen less far than in other countries," he noted. Turning to the manufacturing sector, Clementi said the rise in manufacturing output in August was unexpected, adding that whether this pickup will persist remains unclear at the moment. He also said that upstream inflation remains "very subdued." "Some business costs, such as insurance, will rise, but that should be at least partially offset by the sharp fall in oil prices," he added.
"There are, I think, clear downside risks. The world economy may slow further if adverse confidence effects persist. Spending which is currently delayed may be cancelled. And the labour market may begin turning more decisively in the UK," he said.
But for the moment these risks need to be weighed against the continued strength of domestic demand, he cautioned. The full effect of the bank's 150 basis points rate cut since the start of the year have still to come through, he added. Clementi said monetary policy reaction in the wake of the September 11 attacks were rapid.
"These actions should clearly stimulate demand. But, as is always the case, the size and timing of these effects is extremely hard to judge," he added.