Economic insight: 2008 outlook

Are the economic good times well and truly over? Trevor Williams, chief economist for Lloyds TSB, argues that next year won’t be as bad as some fear

The key question for next year is whether there will be a significant fallback in consumer demand. Shopping online is booming but it’s still not the way the majority of people buy their goods and the high street will be crucial to consumer spending in 2008.

The credit crunch has not yet had a major impact on the retail sector. It’s hit the balance sheets of those involved in wholesale borrowing, but rather than causing a collapse, I suspect it’s likely to lead to a slowdown in consumer spending.

Recent figures show that people’s willingness to borrow and spend is still quite high, but there’s been a shift towards different types of borrowing, like using overdraft facilities. Nevertheless, the retail spend for 2007 is still likely to be higher than that of 2006.

If the economy does begin to slow, the bank still has the space to cut interest rates, so I remain relatively confident. Even if the economy slows to 1.5 per cent growth, the bank could cut interest rates to 4.5 per cent. There’s room to manoeuvre so I think we’re far from looking at a recession next year.

Another point to consider is the housing market. House prices are definitely decelerating, but again the question is whether this indicates the beginning of a collapse. That growth could slow to around two per cent, while it’s been up to ten this year. That represents a deceleration, rather than an absolute fall.

Lastly, currency’s going to be a talking point. Sterling against the dollar is overvalued at the moment at a 26 or 27-year high. If there’s a drop it will crimp the room available for a reduction in interest rates, should it be needed.

People will be asking if the global economy can continue to grow in the face of a US slowdown. The external economic environment matters to the UK because we are a big trading player; if the global economy did slow, the financial services sector here would feel the impact.