Is UK recession a risk?

There will, however, still be additional difficulties in sustaining economic growth, especially as government spending will not be able to provide significant support after strong increases over the past five years. The 2005 first-quarter GDP figures were revised lower while the data for 2003 and the first half of 2004 were revised up. This suggests the government’s overall financial position is much weaker than it appeared previously. Overall, it is likely to be a question of how rapidly the economy will slow rather than whether it will slow at all.

A downturn in the economy might create a vicious circle, with falling house prices, for example, curtailing consumer spending. This would, in turn, reinforce downward pressure on housing prices as distressed selling would increase.

The BOE could also be restrained in its ability to cut interest rates if inflationary pressure increases. With fiscal policy unable to provide as much support, the economy could easily slide into recession. The more likely outcome is the housing bubble will deflate slowly over a period of years. This could prevent a full-scale recession, but would increase the risk of below trend growth over a sustained period.