What's Next for UK?

This year can be crucial for the British economy since it may bring a significant reduction on its economic growth. Slowing housing market and tighter financial conditions could be at the heart of the slowdown.
Anna Fedec, analyst@tradingeconomics.com 3/25/2008 9:40:26 AM

However, one of the biggest problems for the UK economy is its dependence on the financial sector. This sector constitutes a large share of the gross domestic product and the implications of its downturn may spread to the other sectors of the British economy.

Furthermore, the consumption outlook doesn't look very promising ether. In fact, the signs of slowdown have been visible in Q4 of 2007 when household spending growth and investment demand have decreased more than expected. Also, in February U.K. consumer confidence slipped to the lowest level in more than three years prompted by higher energy and food prices. Moreover, house prices fell for a fourth month in February in the worst streak of declines since 2000. It is also very likely that the labor market could weaken after unemployment reached the lowest since 1975.

The Bank's of England freedom to respond to the slowdown is limited as the downturn of UK's economy was mainly caused by the increasing prices of houses. Moreover, interest rate cuts may not be an option for the BoE since inflation expectations are soaring and the British pound is depreciating.