Another day, another dire warning about the state of the UK economy foreseeing the possibility of a "collapsing house price nightmare" ............................
Daily Telegraph. 13th May
Collapsing house price 'nightmare' a real risk, says bank
By Ambrose Evans-Pritchard (Filed: 13/05/2005)
Bank of America warned yesterday that Britain could face a "nightmare
scenario" as collapsing house prices combined with the pain of tighter
The bank's top team of economists said Britain is "likely heading for a
much rougher time in the third Labour term".
"A rising burden of taxes and regulations" has eroded the country's
competitive advantage, they said.
"On the demand side, the debt financed spending spree of consumers is
petering out while the almost unprecedented surge in government
spending looks increasingly unsustainable," warned the client note.
The report said that the Bank of England would have to start cutting
rates in the autumn as the slowdown became apparent. It forecast
quarterly growth of 0.4pc through the second half of 2005, but stopped
short of predicting a recession.
"Skyrocketing house prices" had enabled consumers to draw down
"staggering" levels of mortgage equity for spending. But the
"multiplying" effect of the boom was running out under the delayed
impact of earlier rate rises.
The report said the public sector could no longer fill the breach after
the sharp rise in spending between 2001 and 2004, when the state
accounted for 45pc of all jobs created in Britain.
The spending had been "largely financed by a rising fiscal deficit",
causing the government finances (adjusted for the cycle) to deteriorate
from a 1.2pc surplus in 1999 to a 3.4pc deficit in 2004, leaving
"hardly any leeway to offset a downturn in private demand".
"We cannot rule out a nightmare scenario in which a decline in
consumption caused by a sudden correction in house prices would lead to
an explosive rise in the fiscal deficit that would have to be addressed
by a tighter fiscal policy," said the note.
Lorenzo Codogno, the co-author, said Britain now had one of "worst
deficits" in the industrial world, given the late stage of the cycle.
Germany and Italy had similar deficits, but in the context of an
"If there was a recession, the British deficit could jump dramatically,
easily exceeding 5pc," he said.
Bank of America said it still believed a "soft-landing" was likely for
the housing market. It said British house prices had raced ahead of
even US property in recent years, leaving little doubt that the country
was in the grip of a speculative bubble.
In a warning shot, the report said Britain's ever more bur-dened
economy could soon find itself being overtaken by the euro-zone.
- posted 15 years ago