SLIDE IN UK SERVICE SPENDING TO BRING DOWN INFLATION.

Position:United Kingdom
 
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Growth in UK household expenditure on services steadily grew by about 5 percent year-on-year until the second quarter of this year when it dropped off due to decreased rents and lower fuel costs. Household spending on services should continue to slip a bit during the remaining months of 2003 and that will help the UK to reach its inflation goal of 2.5 percent.

More than likely, UK inflation will drop below the 2.5 percent mark by the first quarter of 2004 and that will pave the way to a further cut in interest rates if slack demand for goods and services warrants it. The cost of financing is running at the lowest level recorded in nearly 50 years. That will lead to increasingly attractive terms of sale for high-end durables.

There are conflicting indicators with regards to high-end spending over the next six months. During the second quarter, consumer confidence bounced back from low levels registered late in the first quarter of this year. Nevertheless, residential real estate sales dropped off more than 7 percent year-on-year so far in 2003 as housing costs (especially in London) moved beyond reach of the average family. This will contribute to a slower pace of growth in residential real estate sales into 2004. As a result, year-on-year growth in residential real estate values should drop to about 10 percent by the end of 2003 after lingering at over 20 percent for several years.

Sales of non-durable and semi-durable goods should hold firm through the remainder of this year and the first half of 2004. Year-on-year growth should hold in the range of 1 to 3 percent, possibly rising above that range temporarily as 2004 progresses. In the medium- to long-term, demographic factors will limit sales growth in these sectors. According to data released by the Population Reference Bureau (PRB), the population of the UK will increase 9 percent from 2002 through 2050. Overall growth in household...

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