The terrorist attacks in the US have unleashed what looks set to be a protracted fog of uncertainties – both about the depth and duration of the current economic downturn.

Analysts and commentators in the UK divide into two broad camps. One contains those full of gloom about global and British recession. The second are the optimists who see a cyclical slowdown, made worse by the terrorism, but which fails to justify talk of recession.

There is a good chance that the UK will be among the least affected of the world’s industrialised nations. In the second quarter of this year, for example, UK growth was among the fastest in the G7, at an annual rate of 2.3%. Household spending and strong performance in services and construction compensated for severe weakness in manufacturing and exports – although services subsequently took a knock in September for the first time since February 1999.

Construction purchasing managers say that activity continued to expand during September, although it was the weakest for 10 months. Most buoyant was the housing sector, which grew at the same rate as in August. Growth of the construction industry’s overall order book eased for the third consecutive month – to its weakest since February 1999.

The housing market overall is showing the first signs of a slowdown, with demand falling in Greater London and the south-east since mid-summer.

The market across the country is more robust, with Nationwide Building Society reporting a price increase of 2.8% in September, and a zero growth figure from the Halifax Bank. The real change probably lies between the two, but both relate to the pre-September 11 attacks. Both lenders agree that house price inflation is set to slow, but neither expects a fall.

In the next few months, measures of consumer confidence and spending hold the key to the medium term outlook. It will be some time before hard statistics will be available which reveal the impact on household spending, but the first surveys covering the post-September 11 period suggest that the events may have had little immediate effect on consumer optimism or spending.

The EC’s index of British consumer confidence, compiled by research company GfK, fell to -3 in the week after the attacks. This compares with -1 for consumers interviewed in the first 11 days of the month, and an August score of zero. The measure relating to the benefits of making major purchases fell three points in September to stand at +18.

Retail sales volumes grew at the fastest pace for five years in September, according to the CBI, in whose survey 70% of responses were made after the terrorist attacks. Furniture outlets achieved the weakest growth, with 19% of respondents reporting higher volumes than a year earlier – down from 27% in August, but up from -14% in September 2000. DIY and hardware outlets performed better, with 24% recording year-on-year growth.

There is little evidence of inflation gathering significant pace. The British Retail Consortium‘s shop price index indicates a year-on-year rise of just 0.1% in September. The annual increase in the official retail price index, which includes a range of product and service prices in addition to high street purchases, fell to 1.7% in September from 2.1% in August, while the underlying rate fell from 2.6% to 2.3%. Furniture was up 1.1% on the year to September and DIY materials were 1.7% higher.

Further back in the supply chain, factory gate prices fell by 0.2% in September – their biggest annual drop since records began in 1958. The average price of wood and wood products was unchanged in the year to September, following a year-on-year decline in the two previous months. Input costs meanwhile fell by 1.1%, compared with 0.7% and 0.4% in August and July respectively.

Most pay settlements in the coming pay round are expected to be in the 2.5-3.5% range, according to Incomes Data Services. Settlements so far this year have been between 3-4%, it adds.
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