Housing and consumer downturn fans recession fears

House prices crumbled at record rates and consumer confidence hit historic lows, data showed on Thursday, fuelling fears that a consumer-led slowdown could tip the economy into recession.

The Nationwide building society said house prices fell by 1.7 percent this month, leaving them 8.1 percent lower than a year ago - the biggest annual fall since the series began in January 1991.

House prices have now fallen by nine percent in nine months from the peak hit last year, an even sharper fall than during the property crash of the early 1990s.

The combination of falling house prices and rising household bills is weighing increasingly heavily on consumer morale. The GFK NOP consumer confidence index fell five points in July to -39, the lowest reading since the survey began in 1974.

The figures flag the threat of a sharpening consumer retrenchment and the uphill struggle facing Prime Minister Gordon Brown if he is to regain public support before the next election, expected in 2010.

"The combination of weaker consumer confidence and sharply slowing house prices will take its toll on consumer spending and the broader economy throughout the remainder of this year," said George Buckley, chief economist at Deutsche Bank.

ANY RATE RELIEF?

Consumers have plenty of reasons to feel glum - rising unemployment, muted wage growth, a sharply slowing economy and the highest inflation rate in more than a decade.

Ratings agency Standard & Poors forecasts 1.7 million homeowners could be left with properties worth less than they owe on them if house prices fall by a further 17 percent.

The drip-feed of weak economic indicators over the past few weeks has already generated speculation that the next move in official interest rates will be down.

However, Bank of England policymakers have indicated they are in no hurry to cut rates when inflation is at its highest in more than a decade - 3.8 percent. And all 76 economists polled by Reuters expect the Bank to hold rates at 5 percent in August.

Arch Bank hawk Timothy Besley said price pressures warranted a "mildly restrictive" monetary policy, such that the level of interest rates bears down on the economy.

"We've found in the past that once inflation gets significantly out of control, it's extremely difficult to bring it back," he said in an interview with the Daily Telegraph.

Gas and electricity suppliers are also starting to ramp up prices, which could drive inflation even further above the central bank's 2 percent target.

The country's biggest supplier and British Gas-owner Centrica said this week it would hike gas prices by 35 percent and rival EDF last week said it was raising prices for gas and electricity by about a fifth.

With the exception of oil companies, the corporate newsflow has also been bleak.

HBOS, the country's biggest mortgage lender, said it was considering asset sales after reporting profits more than halved in the first half and all-purpose retailer Woolworths had to issue a profit warning earlier this week.

HBOS also predicts house prices will fall by 15-20 percent over 2008 and 2009.

"Ripples of weakness are spreading across retailing, construction, services and manufacturing, with deteriorating corporate liquidity and rising unemployment," said Michael Saunders at Citi. "With monetary and fiscal policy both hamstrung, most of the economic pain still lies ahead."