The following statement updates the staff report for the 2002 Article IV consultation on the United Kingdom. This information does not change the thrust of the staff appraisal.

1. Recent indicators of real economic activity suggest a weakening of industrial output, and possibly consumer demand, but labor market indicators remain strong.

• In the fourth quarter of 2002, industrial production fell by 0.7 percent (quarter-on-quarter, seasonally adjusted) or 1.2 percent over the fourth quarter of 2001. The decline reflected mainly manufacturing output.

• The latest CBI industrial trends survey indicated a deterioration in new orders in January.

• The volume of retail sales fell by 1 percent (month-on-month, seasonally adjusted) in January, partly offsetting the strong rise in the index during the December holiday period.

• Following a sharp decline in December, the consumer confidence (GfK) index remained low in January relative to levels during most of 2002. The measure relating to consumers’ spending intentions over the next 12 months fell in January to its lowest level since December 1998.

• The unemployment rate (ILO basis) edged down to 5.1 percent in the fourth quarter of 2002, while the employment rate rose by 0.3 percentage points (quarter-on-quarter, seasonally adjusted) to 74.6 percent. On a claimant count basis, unemployment remained unchanged in January. Labor shedding in manufacturing continued, with manufacturing productivity rising by 3.5 percent in the fourth quarter compared with the same period the previous year.

2. Inflation (RPIX) remained at 2.7 percent in January, but declined on an HICP basis to 1.4 percent from 1.7 percent in December, Growth in average earnings edged down to 3.7 percent in December reflecting a pick up in public sector earnings growth to 4.6 percent (up 0.3 percentage points from November), which was offset by an easing of private sector earnings growth to 3.5 percent (down 0.2 percentage points from November).

3. House prices increased further in January by 1.5–1.7 percent over December. The February 2003 Inflation Report, however, noted some early signs that housing demand may be easing. Equity prices continued to decline, with the FTSE all share index falling by some 5½ percent from end-2002 to February 21, 2003.

4. The overall fiscal deficit, measured by public sector net borrowing, reached a cumulative £16.7 billion during April 2002-January 2003, some £18.3 billion higher than the deficit during the same period the year before. This outcome is in line with staff’s projection of a deficit of £21.5 billion for FY2003/03, which closes at end-March.

5. Preliminary trade data indicate the trade deficit (goods and services) reached 2 percent of GDP in 2002, narrowing somewhat from the deficit of 2.3 percent of GDP in 2001. The volume of merchandise exports fell by 2.3 percent while the volume of merchandise imports increased by 0.9 percent over the same period.

6. On February 6, 2003, the Bank of England lowered its policy rate by 25 basis points to 3¾ percent. Forward rates suggest the market now expects a further 25 basis point cut by end-2003, with rates rising back to about 4 percent by end-2004. Following the cut in interest rates, sterling weakened by about 3½ percent against the euro and the U.S. dollar. In the staff’s view, the rate cut was appropriate, given the weakening of the global growth outlook and a possibly sharper slowing of U.K. consumer demand than previously expected—as suggested by January retail sales, the recent declines in consumer confidence, and the fall in equity prices since mid-January. Staff remains of the view that, in the period ahead, risks are broadly balanced and that monetary policy should continue to react promptly to changes in domestic and external prospects, including in domestic credit markets. In this respect, the February Inflation Report noted that secured borrowing has continued to rise, but that the growth in unsecured debt has moderated somewhat.