The global big chill and its effect on Britain

Last Modified: 22 Jan 2008
By: Faisal Islam

If America does go into recession, is British manufacturing and the cheap pound enough to keep the economy going?

Can Britain buck the trend?

So the Dow Jones and other stock markets are down, but the Footsie in this country has bucked the trend, finishing nearly 3% up.

The global markets have been reacting to fears that the US is heading into recession. But are these fears justified? And would Britain necessarily follow America into the economic abyss?

Employment key

The key to avoiding a prolonged US economic freeze will be what happens to employment.

Last December, there was an increase of just 18,000 in the number of jobs; the same time last year, employment rose 226,000.

It was the weakest level of jobs growth for more than four years, and a key indicator that the US is grinding to a halt.

Rest of the world

Taking on the baton of being the driving force of the global economy over the next decade are the nascent economic superpowers of the East.

And rather abruptly we now have a serious test of whether they can break free of the problems in the US. Today's news of multibillion-dollar US mortgage exposure in China's banking system bodes poorly and lead to stock markets plunges there.

Britain's trade with the rest of the world may be shifting, but not enough to avoid the big chill from over the pond.

Strong growth

Over the last ten years, UK exports to China have grown rapidly from one billion pounds to four point seven billion.

But at the same time, exports to the US have expanded from £33 billion to £59 billion. However, at the moment growth is still strong here. Exports will be helped by a falling pound and few economists are predicting a UK recession this year.

The barriers

However, three key supports to the British economy - housing, financial services and global growth - are looking shaky.

"Don't go for short term packages" has been the treasury mantra for years. But what if we do follow US? Scope for interest rate cuts here may be limited.

A slowing economy may mean a tax-and-spend fiscal stimulus would be difficult even if the Treasury believed in it.

Housing imperative

The housing market will be key - doomsters in the City point out two factors.

That British housing is where US housing was 15 months ago yet whereas the US property bubble burst when house prices reached six times earnings, over here they are nine times. And that would be a much steeper fall.