Why the bad news is set to continue for the UK economy

***Why the bad news is set to continue for the UK economy

***Is the US housing cash machine about to stop paying out?

***RECOMMENDED ARTICLES: Could Iran's nuclear aims topple the US economy?... Do we really need central banks?...

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The bad news just keeps coming for the UK economy.

On Tuesday, telecoms group Cable & Wireless announced it is slashing its workforce by up to 3,000 over the next five years. And it wasn't the only one with grim tidings for its employees - beleaguered furniture retailer MFI is to cut back nearly 1,500 positions.

Meanwhile, the Confederation of British Industry's retail survey for February showed that employment levels in the retail industry fell at the fastest rate since records began, 22 years ago.

And it doesn't look as though things will get better any time soon

The CBI's February retail survey showed that sales on the high street were down again compared with the same time last year. Once more, those hardest hit included hardware, furniture and DIY stores.

That chimes with MFI's dismal annual results. The group plunged into a full-year pre-tax loss of £110.8m from a profit of £20.6m in 2004. Sales have remained poor in the first few weeks of this year, with like-for-like sales (that is, sales excluding new and closed stores) down 14% on 2005.

The group now plans to focus on a smaller range of more expensive products. It will close 11 stores and cut back manufacturing capacity, based in Stockton-on-Tees and Scunthorpe, by around 40% - hence the 1,500 job losses.

But it could be facing an uphill struggle. As if rising unemployment wasn't bad enough, consumers are facing ever-increasing costs at home as well. Powergen customers are the latest to face another double-digit hike in their energy bills. From March 10th, gas bills will rise by a whopping 24%, while electricity bills are rising by 18.4%.

According to Powergen, that will add £107 to the average annual gas bill and £56 to the equivalent electricity bill.

That kind of rise hurts. That's like having to pay for your TV licence or your road tax twice. Or having to fork out for an extra month's worth of council tax. And less money at home, means less money spent on the high street.

As the CBI's John Longworth says: "With rapidly rising household bills for energy, water and council tax, it's no wonder that consumers remain cautious about spending money."

Meanwhile, the latest news on the housing market cast some doubt over the recent surge of optimism from property pundits.

House prices fell 0.2% during February, to an average of just over £158,000, according to Nationwide building society. The annual rate of increase fell to 3.7% from 4.4%.

Given the lack of unbiased information, you can't take any single property price survey too seriously. But some can be taken more seriously than others. Nationwide may have a vested interest in the property market, but at least its reports are based on actual property sales.

In particular, its latest findings seem to make a nonsense of property website Rightmove's widely reported survey that suggested the average asking price for a UK home rose above £200,000 in February.

If the average asking price is more than £200,000 but the average buying price is just under £160,000, then that means the average buyer is negotiating a discount of more than 20%.

Perhaps the UK's homebuyers have become a lot more hard-nosed than we give them credit for. Or maybe, as we suspect, the Rightmove figures are a better indicator of estate agents' confidence levels, rather than the true value of houses.

Of course, any signs of a wobble in the housing market will be seized upon by the interest rate doves as a go-ahead for the Bank of England to cut rates. But soaring energy prices are going to make it difficult for the Bank to keep inflation within its target range in the coming months. So retailers and estate agents can't look to the Bank for a fresh jolt of cheap money.

And nor can housebuilders. Taylor Woodrow saw pre-tax profit rise 2% to £411m last year from £403.9m in 2004. But the gain was mainly due to a strong performance in the US. Completed sales in the UK fell 10% to 8,178, while profit on sales plunged 22% to £233.4m. The average sales price fell from £197,000 to £185,000. The group also admitted that it is "still too early to predict the UK market for 2006".

But despite its hopes for another good year in America, it might not be able to rely on the US housing market for much longer either. New housing starts fell 5% in January, while existing home sales dropped 2.8% and the number of properties on the market rose. The last time there were so many houses available was in August 1998.

And inevitably, the wobbly US housing market is taking its toll on American consumers, just as it did in the UK. US consumer confidence fell sharply in February, with people feeling more pessimistic about the future than at any time since March 2003. It's no surprise, given that Americans have been relying on non-stop house price inflation to fund their spending habits.

You can read more on why the US consumer is vital to keeping the whole global economy afloat, on our website, by clicking here: Why you should be worried about the US property market

Suffice to say, if Americans stop spending, there will be a lot more bad news in store.

Turning back to the stock markets

A weak start on Wall Street saw the FTSE 100 plunge, down 84 points to 5,791. Royal Bank of Scotland was one of the few risers, climbing 3% to £19.09 as it announced a £1bn share buyback along with record annual profits. Alliance & Leicester was the main faller, down 5% to £10.69 on poor broker reaction to Monday's final results. And Vodafone continued to decline, losing 4% to 109p. For a full market report, see: London market close

Over in continental Europe, the Paris Cac 40 fell 80 points to 5,000, while the German Dax shed 119 to close at 5,796.

Across the Atlantic, US stocks dived as internet giant Google's chief financial officer warned of slowing growth at the company. Google closed 7% lower at $362.62 a share, though at one point lost as much as 13%. A weak consumer confidence reading and news of a further fall in home sales during January also weighed on sentiment. The Dow Jones fell 104 points to 10,993, while the S&P 500 dived 13 to 1,280. The tech-heavy Nasdaq shed 25 to 2,281.

In Asian trading hours, oil edged higher, to trade at around $61.50 a barrel in New York. Brent crude was trading at around $60. Meanwhile, spot gold was trading at around $561 an ounce.

The weak session on Wall Street also weighed on Asian stock markets. The Nikkei 225 fell 240 points to 15,964, with exporters such as Sony the main losers.

And here in the UK, the country's fourth-largest bank HBOS said pre-tax profit rose to £4.8bn from £4.1bn last year. But the bank has also seen a 28% rise in bad debts on its loans.

And our two recommended articles for today...

Could Iran's nuclear ambitions topple the US economy?

- A successful financial model will be used in progressively riskier situations until it reaches its breaking point, argues Roger Lowenstein in his book 'Origins of the Crash'. The Daily Reckoning's Justice Litle wonders if the stand-off in Iran could be that breaking point. To find out why the mountain of debt that has supported the US economy for so long could be toppled by Iran's nuclear ambitions, click here: Could Iran's nuclear ambitions topple the US economy?

Do we really need central banks?

- The idea that the Federal Reserve is in the driving seat of the US economy is a dangerous delusion, says Chris Mayer in Whiskey & Gunpowder. Now, as Ben Bernanke takes over as Fed chairman, even mainstream analysts are starting to question the point of central banking. To find out why the US central bank is becoming increasingly irrelevant, click here: Do we really need central banks?