3 October 2001, 14:29  FOCUS - UK economy holding its own in light of weaker global demand

--- by Pan Pylas ----
LONDON (AFX) - A raft of data today provided further evidence that the UK economy is holding up better than expected in the face of weakening global demand and uncertainty generated by the terrorist attacks on the US, economists said.
Nevertheless, economists expect the Bank of England's nine-member Monetary Policy Committee to cut interest rates tomorrow by 25 basis points to take the repo rate to 4.5 pct, the lowest since the 1960s. Last night, the Federal Open Reserve Committee cut its key lending rate by 50 basis point to take it to a 39-year low of 2.5 pct. In the last week or so, UK 'rate bulls'-- analysts who are forecasting a sustained period of decreasing interest rates -- have been on the defensive. First of all came an upward revision in second-quarter GDP, which gave the UK economy a further buffer to counteract any potential slowdown.
Then came Monday's Nationwide housing survey, which showed that in September, house prices increased at their highest rate since June 1993. And then this morning, the Confederation of British Industry's monthly Distributive Trades Survey suggested that retail sales volumes were holding their own despite the terrorist attacks on New York and Washington. In fact, the retail sales volumes in September grew at their fastest pace for five years.
"It has been a difficult few days for rate bulls such as ourselves, with the housing market and retail side reporting very strong activity levels," said Ciaran Barr, an economist at Deutsche Bank. However, today's UK purchasing managers' index service sector report "reminds us (and the MPC) of the continued uncertainty in the economy", said Barr.
The Chartered Institute of Purchasing and Supply reported that its service sector business activity index fell to a seasonally adjusted 48.1 in September from an unrevised 50.9 the previous month, according to market sources.
Roy Ayliffe, director of professional practice at the CIPS, said confidence was hit by attacks on the US and that the business activity index was the lowest since December 1998. The drop was similar to the fall in the euro zone and indicated that the attacks on Sept 11 exacerbated the existing weak market trends already in place, with clients cancelling business due to uncertainty, especially in hotels and transport, said Barr. "This soft report should tip the balance in favour of a 25 basis point rate cut tomorrow to 4.5 pct, although the decision is unlikely to be unanimous," said Barr. "More cuts will require evidence of a weaker consumer sector. Our target is 4 pct." Robert Jukes, an economist at Credit Suisse First Boston, said the weaker data "would seem to suggest that service sector sentiment has been hit a little harder by the terrorist attacks than other sectors reported so far".
"The issue now, however is how long this is likely to last -- we suspect the impact may well be temporary," said Jukes, who is anticipating another rate cut tomorrow as well. The Halifax September house price survey also encouraged those anticipating a rate cut tomorrow. Unlike the Nationwide, the Halifax survey found that house prices were flat. However, there's no evidence of a sharp slowdown in the housing market, economists said. Though the surveys contrast each other, Jukes thinks that taken together "house prices remain relatively firm". Merrill Lynch economist Ian Stewart agrees that overall the housing data is still "very strong", especially when looking at other indicators like mortgage approvals.
Though the indicators in the UK are mixed, with positive housing and consumer news balanced by weak PMI service data, a sharp fall in equity values and an increase in risk aversion, Stewart thinks rates will be cut tomorrow.
"Our mistake this year has been to focus too much on current indicators of consumer activity," said Stewart, "when the Bank has been more forward looking on global growth."

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