UK economic fundamentals look good for next year, but there is a downside risk that could be sparked by US consumption falling if the housing market there slows, analysis by L&G suggests.
Looking ahead to possible economic trends through 2006, the insurer says the UK experience through the past year has show how consumer confidence can be knocked by a stuttering housing market, with all the subsequent fallout implied.
For example, UK GDP growth rates are at their lowest level since 1992. That said, the company’s current outlook is relatively benign: UK interest rates are expected to remain in a band between 4.25% - 4.5%, while the FTSE 100 index is expected to trade between 5,500 - 5,800 points.
The downside risk comes because of recent interest rate moves in the US. Another hike in the key Federal Reserve rate has taken the US equivalent of the UK’s base rate up to 4.25%.
With housing costs sharply up, corporate turnover growth stabilising and corporate profits as a proportion of US GDP already at record highs, there is a high risk of consumer spending going the same way it has already in the UK.
Were this to happen it would have “global ramifications”, L&G says, especially as there is “no second ‘US’ to support the US economy”.
A UK-style soft-landing is one possibility, but the extent to which US households will be seeking to rebalance their budgets through next year is as yet unknown.
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