The economic landscape
There has historically been a strong correlation between our revenue performance and the health of the major economies of the UK and US. This relationship has continued throughout 2007/08 as both these markets began to show signs of weakness.
The long awaited softening in the UK economy, which the Bank of England had been trying to engineer through higher interest rates, failed to materialise in 2007. Indeed, real GDP growth accelerated to 3.1 per cent from 2.9 per cent in 2006.
But during the latter part of 2007, there was growing evidence that the UK economy was approaching a turning point. The financial market crisis had intensified, while high interest rates, high household debts, and reduced credit availability were finally starting to affect housing demand and prices. Against this background, there were also signs that the long expected slowdown in consumer spending had finally begun.
Economic slowdown really began to bite in the early part of 2008. The credit crunch has started to affect the real economy, with households and businesses finding access to credit materially reduced. Growth in the housing market has stalled, and house prices have started to edge down. Rising fuel and food prices have further squeezed real disposable incomes, although retail sales have remained remarkably resilient. The downside risks have increased, and growth is expected to slow.
The US economy experienced a clear softening in 2007, largely as a consequence of problems in the residential housing sector, which culminated in the sub-prime crisis. Conditions have continued to deteriorate and at a faster pace, with consumers hit by higher unemployment, rising energy prices, continued problems in the housing market, and falling wealth. There are also signs of weakness in the business sector.
The Federal Reserve has so far responded with aggressive cuts in interest rates contributing to a further weakening of the US dollar, particularly against the euro and yen. In addition, the US Government has responded with significant tax cuts.