Signs of encouragement for optimistic Chancellor

Analysis

Consumer spending has grown more slowly during the 1990s than at any time since before the First World War. Even during the depression of the 1930s there were years when people could increase their spending at a faster rate than they have during this ''feel-bad'' decade.

Chancellor Kenneth Clarke faces an uphill struggle to restore some feelgood to the economy before the general election. But there are signs of an improving housing market, whose collapse made a profound contribution to Britain's loss of economic morale.

There is growing evidence that the three reductions in the level of base rates since December combined with the mortgage price war have started to help the housing market recover. The rise in house prices last month was the biggest for two years and the seventh in succession, the Halifax building society reported this week. For the first time since the beginning of 1995, house prices were higher than they had been a year earlier. This followed reports of an increasing house sales and higher mortgage borrowing.

Up to a million and a half people remain trapped by negative equity thanks to the drop in house prices since the 1989 peak. But experts estimate that it would not take a big increase in prices to whittle these numbers away. Prices rising at an annual rate of 3-4 per cent would almost eliminate negative equity within two years.

Gary Marsh, chief economist at the Halifax, expected exactly this sort of steady recovery. "The housing market will not be like the 1980s but it will get on to a more even keel. A more stable economy makes for a more stable housing market," he said. But he adds that the psychological scars of the market's collapse will be only gradually erased.

There are those who believe Britain is poised for another boom. David Miles, Professor of Finance at Imperial College, London, argued: "The pent-up demand will be released as soon as people become convinced that we have gone past the bottom. There is a reasonable chance of a very powerful upswing in house prices."

However, it would come too late to help the Chancellor. "We could see a very strong 1997 and 1998," Prof Miles said. "Like the building society windfalls, it will happen the other side of the election."

Share handouts from building societies - which will total about pounds 15bn by the end of 1997 - are one reason most economists join Mr Clarke in predicting an increase in consumer spending. Consumers are also expected to spend some of the proceeds from maturing Tessas, estimated at around pounds 45bn this year and next. The rebate on electricity bills and income tax cuts that take effect in April will be the icing on the cake.

There are already signs that spending is picking up. Official figures showed that retail sales volumes dipped in January, but trends are leading upwards. A CBI survey this week revealed firm sales on the high street in February, alongside a surge in optimism among retailers.

Most forecasts for 1996 predict that there will be enough of an increase in spending compared with last year to offset weakness in exports and investment, which were disappointing in late 1995. Although few are as optimistic as the Chancellor, most think the economy can grow at about its long run trend rate - or Mr Clarke's "sustainable rate".

Leo Doyle, an economist at City investment bank Kleinwort Benson, cautions that the improvement in spending looks good only by comparison with earlier weakness. "Cautious spending of windfalls does not make people feel good in the same way as solid increases in their incomes," he said. "Job insecurity will make it hard to engineer a return of the feel-good factor."

The financial markets feel that further reductions in the cost of borrowing would involve running risks with inflation, so the Government may not be able engineer a feelgood factor before the election. "If people feel good, Kenneth Clarke will have gone too far," said Geoffrey Dicks, a City economist at NatWest Markets. "It takes 20 per cent growth in house prices and huge increases in consumer spending to make us happy. If you have that kind of party there is always a hangover."