U.K. Consumer Confidence Falls to Lowest Level Since 1990 Riots

By Jennifer Ryan

June 30 (Bloomberg) -- U.K. consumer confidence dropped in June to the lowest level since the London riots that preceded Margaret Thatcher's downfall in 1990, as house prices fell across the nation.

An index of consumer confidence based on a survey of 2,001 people fell 5 points to minus 34, the lowest since March 1990, GfK NOP Ltd. said today. Property prices dropped 1 percent from May, the most since Hometrack Ltd.'s housing index started in 2001, the London-based researcher said in a statement.

Bank of England Governor Mervyn King said last week that economic growth needs to slow to contain inflation as policy makers consider whether to raise interest rates. With the threat of a recession looming, Prime Minister Gordon Brown's poll ratings a year after he took office are the lowest since World War II.

``With rising inflation, gloomy forecasts for interest rates and soaring fuel, utility and food prices dominating the front- page headlines, it's no surprise that confidence in the general economy is almost in freefall,'' Rachael Joy, a researcher at GfK NOP, said in a statement.

The Bank of England kept its main interest rate at 5 percent for the past two months after three reductions since December. Policy makers predict economic growth will slow to a 1 percent annual pace in the first quarter of 2009, the least since 1992, as inflation accelerates to more than twice the 2 percent target.

London Riot

The confidence gauge is only one point higher than in March 1990, on the eve of the country's last recession. On March 31, as Thatcher's government introduced a new local levy in England and Wales known as the poll tax, rioters rampaged in London's Trafalgar Square. She resigned that November after a leadership challenge by her former colleague Michael Heseltine.

Brown vowed on June 27 to help living standards improve after his Labour Party slumped to fifth place in a by-election. Labour trails the opposition Conservatives by at least 20 percentage points in national opinion polls.

The measure of confidence in the economic outlook dropped 6 points to minus 45, and for personal finances it fell 5 points to minus 9, GfK said. Britons' attitude toward the economy and their own situation in the previous 12 months also deteriorated.

House prices in all 10 regions tracked in the Hometrack survey declined on the month, led by a 1.3 percent drop in the London region and a 1.1 percent decline in the southeast. The average value of a home now stands at 170,500 pounds ($339,000).

Mortgage Squeeze

The property market is cooling as Britons find it harder to get a mortgage. Bank of England data due today will probably show home-loan approvals fell to 51,000 in May, the lowest since at least 1999, according to the median forecast of 29 economists in a Bloomberg News survey.

King told lawmakers on June 26 that banks ``are going to go a lot further than might have been expected initially'' in declaring losses as market turmoil continues. Total worldwide losses and writedowns at financial institutions from the collapse of the U.S. subprime mortgage market now exceed $400 billion.

``In the short term it seems inevitable that prices will continue to post modest falls until such time as confidence improves,'' Richard Donnell, director of research at Hometrack, said in the statement.

Accelerating inflation may prevent the central bank from helping by cutting interest rates. Crude oil rose above $141 a barrel for the first time June 27, while corn, wheat and rice prices have all reached records this year. Inflation reached 3.3 percent in May, the fastest in at least 11 years.

``The impact of the rise in energy and food prices means we all together, as a country, will see a pause in the growth of our living standards,'' King said. ``I am confident we will bring inflation back to the target but I cannot tell you what level of interest rates we will need to set to do that.''

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net