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ECONOMIC GLOOM WIPES £35BN OFF SHARE PRICES

Britain's economic decline has rattled investors

Wednesday July 2,2008

By David Shand, Markets Editor

NEARLY £35billion was wiped off the value of leading UK shares yesterday as further evidence of Britain’s economic decline rattled investors.

The worst manufacturing data since after the 9/11 attacks in 2001, soaring oil prices, a Nationwide survey showing a further 0.9 per cent drop in house prices this month, and worries that higher inflation would bring an rise in interest rates sent shares tumbling.

The FTSE 100 index has lost nearly 13 per cent of its value in the first six months of 2008, its worst first-half performance for 14 years. And it fell again yesterday, by 146 points to 5479.9.

James Knightley, economist at Dutch bank ING, described June’s manufacturing index of 45.8, down from 49.5 in May, as “awful”, with sharp drops in output, new orders and employment.

He added: “Worryingly, even export orders are falling hard, so sterling’s weakness is no longer providing support.”

Worryingly, even export orders are falling hard, so sterling’s weakness is no longer providing support.

James Knightley

Meanwhile, the June Citigroup/YouGov survey of inflation expectations heightened fears the Bank of England would raise interest rates from 5 per cent, despite a weakening economy.

The survey shows inflation is expected to hit 4.6 per cent in the next 12 months — the highest since it began in 2005, and up from the 4.1 per cent expected in May. It is also more than double the Bank of England’s target of 2 per cent.

Citigroup UK economist Michael Saunders said: “The further rise in inflation expectations is bound to alarm the Bank’s Monetary Policy Committee.

“Some may argue the erosion of the credibility of the inflation target does not matter as long as pay growth does not pick up. In our view, that is too complacent.”

Stock market analyst David Buik of BGC Partners reckoned “reality had checked in for a long stay” as dealers’ screens turned into a sea of red.

He added: “Investors are clean out of confidence.

“With oil at $141 a barrel, an extreme credit squeeze, falling growth, collapsing house prices and declining profits — it makes great reading, doesn’t it?”