UK ECONOMY HEADING FOR SOFT LANDING AS A RESULT OF SLOWING HOUSING MARKET

The UK economy is heading for a soft landing with inflation gradually moving up to 2% in 2005 and GDP growing to 3.4% this year, before slowing to 3% in 2005, according to Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland.

Writing in Bank of Ireland Global Markets UK Economic Review, which was published today (Friday, 8th October 2004), he states that although mortgage lending and approvals have eased there will not be a rapid deceleration in lending growth with knock on effects to the UK economy.

"There is some evidence supporting the view that the housing market in the UK has peaked. Mortgage lending slowed in July and August, and approvals fell, pointing to a further deceleration in the annual growth rate of secured lending over the coming months. House prices have also suffered with marginal monthly falls recorded by Hometrack and the RICS survey, although the Nationwide index did rise in August and September following a 2.1% gain in July", said Dr. Dan McLaughlin.

According to Dr. McLaughlin the issue now is whether the housing market slows gradually, a soft landing, or whether prices fall sharply, precipitating a rapid deceleration in lending growth with knock-on effects on economic activity.

"Our view, given the resilience of the broader economy, and the tightness of the labour market, is for a soft landing. Consumer spending in particular remains firm, and a broad array of indicators point to a combination of above trend growth in the coming quarters. Consequently we feel that UK rates are not yet at the peak of the cycle, which we see as 5.25% in February 2005. This will put even further pressure on the housing market, but our affordability model points to a gradual deceleration in house price inflation, rather than a rapid fall".

Consequently Dr. Dan McLaughlin states that: "we have not changed our view on the macro-economic backdrop and still expect GDP to grow by 3.4% this year, slowing to 3% in 2005, with inflation gradually moving up towards 2% over that period".

ENDS

Friday, 8th October 2004

For reference:
Dr Dan McLaughlin
Group Chief Economist
Bank of Ireland
Tel: 01 609 3326

Marie-Therese
Marketing Communications
Bank of Ireland Global Markets
Tel: 01 609 3646

Anne Mathews
Media Relations Manager
Corporate Communications
Tel: 01 604 3836

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