Recent UK economic developments

UK economic growth remained somewhat above trend during the first half of 2007, but slowed progressively to a slightly below trend rate by the fourth quarter (see Figure 1.1). Year-on-year GDP growth has slipped below 3% and a further deceleration seems to have occurred in early 2008. Consumer spending growth generally held up well during the first nine months of 2007, but has weakened since then as the effect of modest real disposable income growth, tighter credit conditions, a weakening housing market and depressed confidence levels have fed through.

Figure 1.1. Quarterly UK GDP growth

The services sector has remained the key engine of growth, although banking and some other parts of the financial services sector have been hit by the effects of the credit crunch and retailing has also slowed more recently despite heavy discounting in some parts of the sector. Manufacturing had been showing some signs of a revival earlier in 2007, but suffered a renewed downturn in the latter part of the year despite the weaker pound.

The US economy has slowed markedly in response to the early weakening of the housing market, with concerns about recession increasing after very slow growth in GDP in the fourth quarter of 2007. Euroland economic growth has also eased back recently, but the Asian economies have remained much stronger. Oil prices have remained relatively high and volatile, and food prices have also been rising. Overall, global growth is expected to be somewhat slower in 2008-9 than in 2006-7, but the consensus view is that there will not be a global recession. However, risks have become biased more to the downside following the credit crunch.

UK inflation was somewhat above its 2% target rate at 2.2% in January 2008 and may rise further as recent rises in producer and commodity prices feed through to the retail level (as yet, profit margins seem to be taking the strain but this is unlikely to continue for much longer). The Bank of England’s Monetary Policy Committee (MPC) cut interest rates in both December and February, with the markets now expecting further gradual rate cuts later this year.