Spending slump prompts calls to cut interest rates

Fears that consumer spending, the main driver of economic growth, is in unstoppable decline will be fuelled this week with fresh evidence of a high street slowdown.

The closely watched British Retail Consortium's monthly sales monitor is expected to confirm anecdotal reports that trading in May was dire. Some analysts are predicting the monitor will show sales fell by 2.5 per cent on a like-for-like comparison with a year ago.

BRC director Kevin Hawkins this weekend called on the Bank of England to offer 'the only possible remedy' by cutting base lending rates and reducing the pressure on household incomes.

'There is extreme nervousness out there, demonstrated by the repayment of credit card debt,' he said. 'The weakening housing market and the increase in taxation mean the only thing that can stop it getting worse is a reduction in interest rates.'

Construction firms are set to deliver a fresh blow to consumer confidence as bosses are privately warning that they expect to axe more construction workers due to the housing market slowdown.

'This sets up a vicious circle: people lose their jobs, so they spend less,' said Vicky Redwood, UK economist at Capital Economics. 'We thought that house prices would fall because the market was so overvalued, but when you get these other factors, it is adding up to something quite serious.'

Housing starts fell five per cent in the first quarter of 2005 compared with the previous year, according to recent figures from the Office of the Deputy Prime Minister.

Miles Shipside, the commercial director of estate agents Rightmove, said that with volumes in the housing market a third lower than last year, layoffs among estate agents are also inevitable.

'They should have started 6-9 months ago. People hoped it would pick up in the spring, then they hoped it would pick up after the election. They've got to ask themselves now what could be the trigger for that.'

The Bank of England is facing a growing chorus of demands for a cut in interest rates as the knock-on effect takes hold.

'I think there is a very, very strong case for considering a cut,' said David Kern, economic adviser to the British Chambers of Commerce.

Brendan Barber, the secretary general of the TUC, said a rate cut could help to cushion the manufacturing sector, which is already in a slowdown. 'Hundreds of thousands of industry jobs are at risk. The Bank must start to consider action as continuing to hold interest rates may not be enough to save these jobs.'