Housing Market Plunge Will Drag Down UK Economy

06 January 2003

The double whammy of a long overdue pricking of the housing price bubble and an increase in unemployment of 25% or more will hit the UK during 2003, warns beancounter Deloitte & Touche.

According to the firm’s latest Economic Review published Sunday, economic growth will slow to 1.75% this year, compared with official forecasts of 2.5% -3.0%. The trigger for the downturn, says Deloitte, will be a 20% deflation in house prices between their peak later this year and a trough in mid-2005. This, in turn, will impact adversely on consumer spending.

Consumer retail profligacy is widely believed to have shielded the UK from the worst of the worldwide recession but, says Deloitte economic advisor Roger Bootle, the knock-on effect of house price deflation will stifle the high street spending bonanza. “Historically, such [declines] in the housing market have invariably been accompanied by a full-blown recession in the overall economy,” he said.

In addition, the D&T report guesstimates that unemployment will rise by more than one quarter to 1.2 million by 2004.

Bootle, however, offered a grain or two of comfort, opining that a fall of half a percentage point in interest rates (from the present 4%) will cushion the impact of the fall in housing values: “The drop in rates will moderate the fall and its consequences.”

He also predicts that government spending will help buttress the UK economy: “Slower growth in household spending will eventually be offset by a recovery in exports and investment, as well as stronger government spending.”

It is, however, a moot point as to whether accountancy firms have a better track record than anyone else at second-guessing the economic future.

As one industry observer points out, for all its experience and claimed expertise, D&T (in its capacity as auditor) failed to see the ten-foot-high writing on the wall at bankrupt US cable giant Adelphia – an audit failure currently under investigation by America’s Securities and Exchange Commission [WAMN: 26-Jul-02].

And for which Adelphia’s new management is suing D&T for billions of dollars[WAMN: 08-Nov-02].

Data sourced from: BBC Online Business News (UK); additional content by WARC staff