Signs of economic slowdown increase

Mortgage lending dipped last month, and growth of the broad money supply - a Bank of England bugbear - slowed. Despite these fresh signs that the economy is cooling off, the financial markets still expect interest rates to rise again. Diane Coyle, Economics Editor, reports.

The building societies and high street banks made new loans amounting to pounds 1.5bn to homebuyers last month, compared with pounds 1.8bn in October. Both groups of lenders said the housing market recovery seemed to be cooling down.

This view was fleshed out by Abbey National, which predicted that house prices would rise by just 5 per cent next year after a rise of about 9 per cent this year. The Council of Mortgage Lenders separately forecast a 5-6 per cent rise in 1998.

Andrew Pople, retail managing director of Abbey National, said: "Over the past few months signs have been emerging that the pace of the recovery is slowing." This was mainly due to the five interest rate rises since May, he said. The growth in both prices and the number of home purchases would slow.

Other lending to consumers last month was buoyant, according to the British Bankers' Association. New loans amounted to pounds 526m, pounds 10m lower than in October but well above average.

However, other figures confirmed the general picture of a gradual slowdown in the pace at which the economy is expanding. The Bank of England reported that year-on-year growth in M4, the broad money supply measure, slowed to 10.5 per cent in November.

The Bank of England said in its last Inflation Report that broad money growth would have to slow to keep inflation on target. While it is probably still too high for comfort, it has slowed from a peak of 11.9 per cent in July.

The detail of the figures showed a sharp rise of pounds 7.2bn in total lending by banks and building societies, but more than pounds 3bn of the increase was due to transactions in the gilts repo market. The underlying increase in lending of around pounds 4bn was similar to recent months. Lending to industry was relatively subdued.

Separately, the Office for National Statistics said the turnover of the engineering industry had risen by 0.7 per cent in the three months to October, taking it to a level 4.2 per cent higher than the same period a year earlier.

There was a 1.5 per cent rise in the industry's overseas sales during the three-month period, while sales in the home market were flat, confirming other signs that exports have so far held up despite the strong pound. The evidence that growth is subsiding is coming from the consumer sector rather than the export industries, which were thought to be the most vulnerable.

Slowdown or not, the financial markets concluded yesterday that the Bank of England will raise interest rates at least one more time in the early months of next year. Along with a strong hint from the Bundesbank that German rates will not rise, this took the pound nearly two pfennigs higher to just over DM2.95 yesterday.