US problems 'will hit UK economy'

Low consumer confidence, plunging house prices and the rising chances of a recession in the US will have a “very serious” knock-on effect for the UK, a leading economic adviser in England has warned.

Ruth Lea, of the Centre for Policy Studies, said the financial troubles in America would be felt “both in the UK and around the globe”.

“It will have a very serious effect on the British economy and the British market is beginning to look quite ugly as well,” Ms Lea said.

Last week, investment bank Goldman Sachs warned that the chances of a recession in the US had risen to between 40% and 45% as consumer confidence dropped to its lowest level since the aftermath of Hurricane Katrina in 2005.

The New York-based Conference Board said its confidence scale dropped from 95.2 to 87.3 between October and November.

Also last week, third-quarter US prices were down 4.5% on 2006 and were 1.7% lower than the second quarter of this year – the sharpest drop in the 21-year history of the Standard & Poor’s housing index.

Ms Lea said the prospect of a growth recession in the US was “almost inevitable” and added: “US problems are always inflated around the globe.”

“There’ll be a very serious knock on effect on financial markets in the UK and globally,” she said.

Referring to the US, Ms Lea went on: “Inflation is still over 3%, the dollar’s weak, and oil at around 100 dollars a barrel doesn’t help either.”

She said that despite all the problems, the US markets were expecting a cut in interest rates by the Federal Reserve, the US central bank, later this month.

“It’s a question of how much they’re prepared to throw inflation risks to one side, to cut rates to keep the economy going,” she said.

“I don’t think they should, because of the inflation problems, but from everything that’s been said the markets are certainly expecting it.

“It would probably lessen the chances of further financial turmoil and that should help the UK and continental markets.

“But it risks the dollar getting even weaker, which would be very bad for the UK and European exporters.”