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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