Abbey reviews 2005 and looks to the future

Abbey chief economist Barry Naisbitt reviews some of the key economic events of 2005 and looks at what might happen over 2006.

Naisbitt says: During 2005 the pace of growth in the UK economy has slowed markedly. While there is still time for activity to show an upturn, it looks likely that economic growth will be around 1.6%, the slowest year on year growth rate for a decade. A key factor behind this slowdown has been the reduction in the households spending growth. Faced with higher interest rates, higher energy prices and, as the governor of the Bank of England has recently pointed out, higher tax payments, households have restricted their spending somewhat.

Interest rate increases in the previous year and the more subdued economic climate have changed the picture in the housing market. Monthly house price changes were around 1% a month in 2004 but have been closer to zero this year, with small falls in some months countered by small rises in others. As a result, annual house price growth has reduced from 14.3% in July 2004 to 3.3% currently. Recently there have been some positive signs from an increased level of activity in the housing market and with the level of house purchase activity recovering after the sharp fall at the start of the year.

Naisbitt adds: Looking ahead, the cut in base rates back in August has probably played a part in boosting confidence and affordability that will stretch into 2006. Economic growth is expected to be a little stronger than this year, but probably still below the long-term trend, which is 2.5%. In these circumstances, the housing market looks most likely to see another year of consolidation, with the monthly pattern of house price changes being variable, as it has been this year. This in turn will mean that annual house price growth is again likely to be in low single digits, maybe around 2% – with prices looking quite flat, albeit with some fluctuations over the coming year.

Naisbitt believes there are always uncertainties about the economic outlook. He says: This year the major surprise has been the rapid rise in oil prices that has had a major influence on the world and UK economy. There may be similarly unforeseen developments next year that will cause the market to revise its forecasts.