Is the UK heading for recession?

Damage initially contained in the manufacturing sector is spreading

As evidence of a world economic slowdown mounts, the BBC's economics reporter Dharshini David examines whether the UK could be heading into the red.

Since the start of the year, the global downturn has intensified, and concerns over a recession in the United States have grown.

Most experts still claim that the UK, thanks to its sturdy domestic economy, will not suffer greatly.

The picture will become clearer on Friday, when figures for gross domestic product (GDP) in both the UK and the US are released for the second three months of the year.

The consensus is that economic growth in the UK will remain at about 2%, allowing the longest period of economic expansion since the war to continue.

Changeable weather?

However, like weather forecasters, economists have been known to fail to spot major storms on the horizon before. And in recent weeks, there have been some ominous clouds gathering.

House prices have on average risen by £20 per day

The US economy has slowed down and demand for UK exports has weakened.

Likewise, the number of profit warnings issued by companies in the UK has risen sharply.

Hardest hit, as in the US, have been high tech firms and industry.

Several high profile companies have cut output, and their workforces - and are doing so with increased frequency.

Spreading from manufacturing

The damage may initially have been contained largely in the manufacturing sector, which accounts for a just a fifth of the economy, but it could be spreading.

According to a survey from the British Chambers of Commerce, some parts of the service sector, particularly those linked to manufacturing, are now feeling the pinch.

The worry is that the slowdown could spread further. According to forecasters at the ITEM Club, weak global demand and the pound's strength against the euro could affect output, investment and eventually jobs across the board.

Once concerns about job security set in, consumers are less likely to spend.

Consumer spending

Consumer spending is the key to keeping the economy on an even keel.

Admittedly, there are other factors influencing spending.

Falling share prices in recent months may have affected households' wealth.

But individuals in the UK hold far more of their wealth in the form of property than shares.

And according to Nationwide figures, house prices have on average risen by £20 per day over the past year in the UK.

However, according to data from research group Cambridge Econometrics, they may not rise much further.

They claim that in London, prices are almost five times as high as income on average - a level last seen just prior to the collapse of the market in the late 1980s. In other words, buyers may be priced out of the market, ultimately forcing prices down.

Gloom overdone?

Several factors suggest such gloom may be overdone.

Consumer spending so far shows little sign of faltering.

Admittedly, High Street sales failed to rise last month for the first time in more than a year. But one month's data doesn't make a trend, and sales remain more than 5% higher than a year ago - hardly evidence of nervous consumers.

In addition the Bank of England has cut interest rates relatively early in the economic cycle. The rate setters themselves admit this was a deliberate move to bolster domestic demand, to insulate the economy from the global slowdown.

Moreover, chancellor Gordon Brown is injecting many billion pounds more of public money into the economy over the next few years to boost investment in public services. This can only stimulate growth in the economy.

And it may not be over for the housing market yet.

Low mortgage rates and the growing availability of generous loans mean that housing remains affordable.

Turning to property

The market has received a boost from an additional source. With lower interest rates and a faltering stock market, many investors are turning instead to property, thereby pushing prices up.

In this case, the result would be a continuation of a two-speed economy. It is not an ideal situation, but as long as the Bank of England doesn't feel it needs to put up interest rates to prevent spending reaching inflationary levels, then growth in the economy as a whole could well continue.

Of course, there could still be a bumpy ride ahead. The risks are numerous. The Bank of England has said it is monitoring the situation and remains poised to change rates - a sign of just how precarious and uncertain the situation is.

But the UK economy remains better positioned than most to weather the storm of the global slowdown.