BRITAIN’S high street boom is slowing down as interest rates start to bite, the CBI said yesterday as it lowered its growth forecast for next year.
Rising rates meant consumers were increasingly unwilling to spend, while high oil prices were likely to hit world demand for British goods, Digby Jones, Director-General of the employers’ group, said.
He warned the Bank of England that even two more quarter-point rate rises, which the market is pricing in by next spring, would hurt the economy if global or domestic demand worsened.
Consumers were now more likely to save, Mr Jones said, while the loss in VAT and corporation tax receipts would put Gordon Brown, the Chancellor of the Exchequer, at risk of breaking his golden rule.
The CBI, in its quarterly economic forecast, revised its growth forecast for 2005 down to 2.8 per cent from 3 per cent. It estimated growth in 2004 at 3.4 per cent.
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It said there were growing signs that consumer spending was starting to moderate, causing growth to slow. Household spending was growing less quickly than in mid-2003, and retail sales had fallen in July for the first time in 14 months. That might reflect the start of a consumer adjustment to the five interest rises since November, it said. There was also evidence of cooling in the housing market.
The report added: “Increased oil prices may have brought forward the peak in global spending.” It forecast oil prices would fall, but would still be higher than was predicted earlier in the year.
Mr Jones said the Bank of England should slacken its pace of interest rate rises.
“Consumers are becoming less willing to spend and more likely to save. We’ve assumed that base rates level out at 5.25 per cent next spring, but even that relatively low peak would be too high if demand at home or abroad suddenly took a turn for the worse. The Bank should not risk damaging the recovery by rushing to add to the range of cost pressures companies are facing.”
The report also said that public finances were showing no improvement on the previous year, despite economic growth being stronger.
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Mr Jones said the Chancellor was now “right on the border of breaking his golden rule” of borrowing only to invest over the course of an economic cycle.
His comments came as new figures showed business investment rose to a record £29.2 billion over the second quarter. The Treasury said it was a sign that growth was getting “stronger and more balanced”.
However, the increase was due to public spending, as the figures showed that private investment fell by 0.1 per cent between the first and second quarters. The overall 0.5 per cent rise was slower than a 1.9 per cent rise in the first three months of the year.
OUTPUT HOPE
Manufacturers aim to lift production despite rising oil prices and interest rates, the CBI’s industry survey for July says. The net proportion of firms expecting a rise in output in the next three months increased from 6 per cent to 19 per cent.