EXPECTATIONS remain strong that interest rates will rise in the first quarter of 2007 - probably next month - with a halt on inflation the main aim. Consumer price inflation rose more than anticipated to 2.7 per cent in November, taking it further above the Bank of England's target of 2 per cent, while retail price (RPI) inflation rose to an 8½-year high of 3.9 per cent.
Earnings growth picked up in October, and the November Bank of England/NOP survey showed increased inflation expectations.
While the Bank, and its governor, Mervyn King, may still want a clearer idea of the strength of consumer spending over Chri
stmas and New Year before acting on interest rates, house prices also continue to post strong gains, unemployment unexpectedly fell in November and the CBI's December industrial trends survey was robust.
"Given the recent developments, it is very understandable why expectations of another interest rate hike as soon as February have risen markedly," said Howard Archer, chief UK and European economist at Global Insight.
Recent Nationwide housing figures showed that UK prices rose 10.5 per cent during 2006. That may warm the hearts of homeowners, who are seeing a healthy return on their investment, but it will only worsen the plight of young first-time buyers struggling to get a foot on the housing market.
The Scotsman reported last week that the average price paid for a first home in Scotland has now topped £100,000.
Lombard Street Research has predicted that by the end of 2007 UK house prices could have put on a further 15 per cent, putting more strain on supply.
Although average earnings climbed to 4.1 per cent in the three months to October from 3.9 per cent in the three months to September, it was exactly in line with the average increase seen hitherto in 2006 and comfortably below the 4.5 per cent level generally considered to be consistent with the Bank of England's targeted consumer price inflation rate of 2.0 per cent.
Underlying average earnings growth (which excludes bonus payments) of 3.8 per cent in the three months to October was again in line with the 2006 average and even further below the critical 4.5 per cent level.
Archer says: "Admittedly, the Bank of England is looking beyond the current earnings data. There is clearly a serious risk that wage settlements will move significantly higher in the 2007 pay rounds in reaction to RPI inflation rising to an 8½-year high of 3.9 per cent in November - and very possibly reaching 4.0 per cent by the end of the year - given that many wage agreements are still influenced by this measure of inflation."
He expects pay settlements to be "modestly higher" in the 2007 pay rounds, but not enough to alarm the Bank.
Archer adds: "Consequently, we believe that there is sufficient slack in the labour market to limit workers' bargaining power and broadly contain wage increases.
"Furthermore, many firms - particularly in manufacturing and retailing - continue to face tightly squeezed margins, reflecting elevated input costs and limited ability to pass on their higher costs through intense competition.
"Wages are largely firms' major costs and the one that they have most control over. Therefore, they will be very keen to keep pay rises as modest as possible."
'Borrowing is growing faster than pay'
CONCERN that the UK's "debt crisis" was spiralling out of control increased in 2006 with a record number of people failing to keep their heads above water.
The personal debt mountain is now more than £1.3 trillion, and the number of people going insolvent during the year is expected to have topped 100,000 for the first time.
The picture could get worse in 2007 as consumers continue to pay the price of chronic overspending in the first half of this decade, experts say.
Figures released over the past year did not make encouraging reading for anyone other than debt collectors.
Consumers in the UK are now responsible for a third of all unsecured debt in western Europe, with the typical Brit now owing more than £3,000 - almost double that of his continental cousin.
Rising household bills coupled with two interest rate hikes in quick succession pushed many homeowners over the brink in 2006.
Repossessions are up by more than 20 per cent year-on-year according to latest government figures, while the amount being borrowed to buy a new home is still increasing.
Citizens Advice says that in the past financial year, the number of people seeking help for serious debt problems rose 11 per cent to 1.4 million.
The number going to Citizens Advice with housing debt worries was up 20 per cent.
Stephen Rose, director of Debt Advice Bureau, said:
"The simple fact is the amount people are spending and borrowing is growing faster than their incomes - it is a simple mathematical equation.
"People will still continue to overspend. County Court Judgements will continue to rise, bankruptcies and IVAs will continue to rise, repossessions will continue to rise.
"We will still have increasing number of people in debt even if nothing nasty happens. If something nasty does happen, all bets are off."
A housing crash, a flurry of interest rate rises or an economic slump could spark a deepening of the crisis.
But others are less pessimistic about the current situation.
Pat Boyden, personal insolvency partner at PricewaterhouseCoopers, said: "I'm not sure it is a crisis. The bare figures look dreadful, but I think essentially the worst is over.
"There will probably be a hangover in 2007 but unless consumers start hitting their credit cards again I do not see it increasing significantly."
'Shopped out' and staying away from sales
AGGRESSIVE discounting by retailers before Christmas could well have left consumers already "shopped out".
After a slow start to the festive season on the high street, consumers finally turned their attention to Christmas shopping, and total consumer spend is expected to reach a record high of £17bn, up 7.65 per cent on 2005.
However, according to Roger Bootle, economic adviser to Deloitte, the tills are unlikely to ring loudly long into the new year. He said: "Consumers will wake up with a bump as they face the poor state of their finances after Christmas. Higher utility bills and interest payments mean there is less money left over to spend on January sales. And rapid rises in the number of people looking for work have made it hard for workers to get higher pay rises to compensate them for this."
The "shopped out" lesson of last month is likely to be a warning to retailers in 2007.
Jim Boyle, retail partner at Deloitte in Scotland, says: "In the first week of January when the credit card bill arrives on the doormat some consumers may feel concerned about how much has been spent and how to tackle the repayments.
"The sales may not provide the usual allure for consumers and the high street may be much quieter than expected in January. "
NEXT FIRST TO REPORT
FASHION chain Next will give a snapshot of conditions on the high street over Christmas when it delivers a trading update this week.
The retailer kicks off the post-Christmas reporting season on Thursday, having seen its share price drift 7 per cent lower since late November. The fall in the value of the stock came as shoppers shunned the high street for much of December and analysts forecast a tough festive season. Richard Ratner, of Seymour Pierce stockbrokers, predicted the worst Christmas for 25 years, although the latest figures suggest that trading may have picked up in late December.
World braced as biggest economy hits the brakes
ANALYSTS predict that US growth is likely to remain supportive to the UK economy - but they are also agreed that the world's most powerful economy is slowing as a result of higher interest rates, higher fuel prices and a weakening housing market.
Of these three, the housing market is now the dominating force. Price increases have decelerated sharply - existing home prices are down on the year. Housing starts and building permits have fallen by almost 30 per cent on the year, while the supply of unsold homes has soared.
According to Dominic Rossi, head of global equities at Threadneedle Investments, this is likely to have a "noticeable impact on overall economic activity", and he has now reduced his US growth forecast to 2.2 per cent.
Han de Jong of ABN AMRO Asset Management argues that a continuing US slowdown in 2007 will have only a muted impact on the rest of the global economy - but the slowdown in 2006 is certainly set to continue into 2007.
"So far, other parts of the global economy appear to be unaffected and they probably have a greater likelihood than in the past of continuing on a favourable growth path, despite the US weakness."
De Jong says the global economy is also likely to slow in 2007, but it will cope well with the US slowdown. He also points out that US consumer confidence has climbed to an eight-month high, pushed up by optimism about the outlook for jobs.
The full article contains 1548 words and appears in The Scotsman newspaper.
