LONDON, July 23: Plummeting stock prices have eroded economic growth expectations but Britain’s economy is still set to pursue recovery this year and next, economists in a Reuters survey said.

Loss of consumer and business confidence and a benign inflation outlook are also expected to keep benchmark interest rates at 38-year lows of 4.0 percent till fourth quarter 2002, when a quarter percentage point hike is forecast. In the April survey the rise was pencilled in for the third quarter.

In the latest survey taken July 16-22, the mid-range of 25 forecasts for average gross domestic product growth in 2002 was 1.8 per cent year-on-year, from 1.9 percent in the April survey.

Next year growth is expected to average 2.9 percent, below the three per cent forecast in the previous survey, but above the 2.75 per cent potential trend estimated by the Treasury.

We have slightly downgraded our forecast, said John Butler at HSBC. The big risk is equity prices. If they keep falling there could be a knock-on effect on the economy through loss of wealth and confidence.

But I don’t think that will derail the recovery as you can’t treat equity price falls separately from what’s happened to sterling and more importantly house prices.

Economists say loss of wealth from individual shareholdings are being offset by the housing market, where prices have been rising by more than 15 per cent per annum in recent months.

And although a slowdown is expected, few predict a collapse that would seriously hit consumer confidence.

We are still getting some very buoyant signs from the household sector, said Steve Andrew at the Royal & Sun Alliance. I don’t expect there to be a huge drop in the housing market, but it will soften once rates are raised.

We’ve seen clear signs of the industrial rebound, albeit from a very weak and low base. —Reuters