HSBC Warns of Two Years of Gloom to Come

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Byline: JANE PADGHAM

A LEADING City economist today warned that the high street is set for two more years of gloom.

John Butler, chief UK economist at HSBC, said consumer spending will slump to its weakest since the early Nineties recession as household debt grows, unemployment rises and the property market stagnates.

That will force the Bank of England to cut interest rates from their current level of 4.75 to four per cent by the end of next year.

The warning comes a day after official figures showed Britons spent less in the shops last month than a year ago - the first annual fall since 1967. It also follows profit warnings and sales alerts from household-name retailers such as Laura Ashley, Dixons and Boots.

Mortgage figures today are expected to reinforce the view that the housing market remains subdued. "What we've seen so far is just a dummy run," said Mr Butler, a former Bank of England economist. "The outlook for next year is very weak consumption growth. The consumer is very vulnerable."

Having driven 80 per cent of the expansion in the economy since 1997, he expects consumer spending growth to slow dramatically from 3.2 per cent last year to 1.7 per cent this year, and The slowdown is partly down to stagnating property values, which makes consumers increasingly reluctant to draw on the equity in their homes.

Mortgage equity withdrawal slumped to less than [pounds sterling]7 billion in the fourth quarter of last year, the lowest for three years, according to Bank of England statistics.

"The main trigger has been a slowdown in the housing market sufficient to remove a lot of finance that was boosting the consumer," Mr Butler said.

"Less mortgage equity withdrawal means less finance available to households - so even a slowing housing-1.2 per cent in 2006.

market is enough to cause a turnaround in consumer spending."

Meanwhile, the burden of consumer debt will grow even if rates stay on hold, he said. There is already evidence that Britons are struggling to service their borrowings after five rises in interest rates in the past 18 months.

Loan write-offs and revaluations by banks reached [pounds sterling]6 billion last year, the highest since records began in 1993, and the number of repossession orders has soared. …