Redundancy fear puts revival at risk

FEAR of unemployment and disenchantment with the Government's handling of the economy could choke off the recent revival in high street spending and dash hopes that the economy may at last be poised to recover, according to a new survey by PA Cambridge Economic Consultants.

But despite the pound's 6.5 pfennig jump against the German mark last week, the Chancellor is understood to be taking a wait-and-see approach to further cuts in interest rates. Treasury officials are encouraged by signs from the high street, but worried by the impact of the recent wave of redundancy announcements.

Consumer optimism has fallen significantly since the pound collapsed out of the exchange rate mechanism on Black Wednesday, according to a quarterly analysis by the economic consultancy.

Confidence in the Government's economic stewardship has dropped sharply since September, and is now barely half its level six months ago.

Two-thirds of people believe the bottom of the recession is still at least six months away, and fewer than one in 100 believes the worst of the recession is already over. There is some evidence that consumers are planning to spend more, but the consultancy attributes this to seasonal factors.

Fear of unemployment had replaced interest rates and house prices as consumers' main worry. Only one person in three has yet felt the benefit of falling base rates, while a quarter expect the financial circumstances to get worse in the next three months.

The survey's results suggest that a cautious view should be taken of recent evidence that the economy may be lifting off the bottom.

Hopeful signs include the slow rise in retail sales volume since the spring, higher car sales and accelerating growth in the amount of cash circulating in the economy.

Demand for credit by consumers also appears to have revived in October, according to Infolink, the credit information organisation. But Brian Bailey, Infolink's chairman, warns that 'whilst the base rate cuts may have achieved the Chancellor's aim of boosting consumer confidence in the short term, the continuing fear of unemployment is likely to remain the major obstacle in the longer term'.

The Treasury will provide an assessment of the current state of the economy on Thursday when it publishes its first monthly monetary assessment. This is a bowdlerised version of an existing internal document used to brief officials and ministers.

Inflation figures for November will also be published on Friday. Falling mortgage rates are expected to reduce the headline rate from 3.6 to 3.2 per cent. But the underlying rate - excluding mortgage interest payments - is likely to be 3.8 per cent, still near the Chancellor's 4 per cent target ceiling.

The National Institute of Economic and Social Research said recently that too much attention had been paid to falls in consumer and business confidence since Black Wednesday, arguing that these overstated the gloom in the real economy. It believes the Treasury's forecast of 1 per cent growth next year may be too pessimistic.

But David Kern, chief economist of National Westminster Bank, forecasts that growth will be roughly in line with Treasury predictions.

He believes a weak recovery will probably start next spring. But he warns that a sustained revival in consumer spending demands that employment and house prices stop falling.

Mr Kern believes interest rates will fall by another percentage point at most in the next few months, but the rising inflationary pressures will see base rates back to 8 per cent by the end of next year. Economic recovery next year will be slowest in the South and highest in the North and Wales.

The London Business School also warns in its International Economic Outlook today that an escalating world trade war, instability in the world financial system and a stalled economic recovery in the US would do significant damage to hopes of economic revival in Britain and the rest of Europe.