The domestic economy

• The post-election recovery in consumer demand has proved fragile with no clear sign as yet that demand is moving above last year's depressed level.
• Spending on major purchases has been particularly weak; consumer confidence has fallen back and households are repaying consumer borrowing.
• Lower interest rates have eased the debt servicing burdens of many households; but the continuing falls in house prices have served to underline the high levels of debt and, for those whose houses are now worth less than the value of their mortgage, have increased the motivation for saving.
• The housing market shows few signs of reviving. Conditions in the commercial property market also remain depressed.
• Nevertheless, in spite of a further 1/2% fall in GDP in the first quarter, there are some indications that activity is stabilising: investment expenditure rose in the first quarter and manufacturing output has been higher than at the end of last year. Modest growth in total domestic demand has been accompanied, however, by a faster rise in imports.
• Progress with inflation continues to be encouraging. Lower earnings growth and improved productivity are reducing cost pressures within the manufacturing sector. Retail price inflation has now fallen below 4% with clear signs that price rises for services, as well as goods, are moderating.

The domestic economy