U.K. Economy Slows Down
This contrasts with the situation in the rest of Europe who seems to be entering a cyclical boom. As a result, Euro-zone growth is almost certain to exceed British growth in 2006 for the first time since the euro was introduced in 1999. Indeed you have to go back all the way to 1992 for the last time that continental Europe outperformed Britain in terms of GDP growth.
There are two reasons for this . First and foremost is differences in what cyclical phase Britain and the Euro-zone is in. Britain is in a cyclical downturn and the Euro-zone is in a cyclical upswing. Britain have not had a recession since 1992 and during the long period since then, British households have become over-indebted as a result of high housing prices. Indeed, the ratio of household debt to disposable income is actually even greater in Britain than in America and is far higher than in the Euro-zone. This will greatly inhibit British growth potential and likely translate either into a recession or a longer period of sluggish growth.
Secondly is that despite all the talk of a "New Labour", Tony Blair and Gordon Brown have in fact greatly increased government spending, resulting both in a higher tax burden and a budget deficit as great as in Germany and France. Meanwhile, in continental Europe, some marginal steps in the right direction have been made, reducing the gap in underlying growth potential between Britain and continental Europe.
While Gordon Brown by some is credited (or blamed depending on your opinion) with keeping Britain from adopting the euro, his big spending policies have contributed to eliminating the growth gap between Britain and the Euro-zone which have been one of the main economic argument (Note that the argument isn't valid as the previous growth gap as well as the closing of that gap now is unrelated to the issue of the euro, but for many people it seems plausible) from euro-sceptics. So, ironically by reducing British competitiveness, he may just have deprived the no-camp of one of its most important arguments against British euro entry.
UPDATE: Today (January 25,2006) the advance GDP report for the U.K. in the fourth quarter of 2005 came in stronger than expected at 0.6% (2.4% at an annual rate). I had expected it to be a lot lower based on the weak employment and manufacturing data. This means that either the employment and manufacturing data needs to be upwardly revised or the GDP data downwardly revised or that service sector productivity have accelerated sharply. It remains to be seen just what will turn out to be true.