Brown loses favour as economy starts to flag

By Matt Falloon

LONDON (Reuters) - The credit crunch is starting to damage the British economy with voters feeling as bad as they did in the slump of the early 1990s and increasingly unhappy with the performance of Prime Minister Gordon Brown.

Brown must call an election by 2010 and will be hoping the economy will have bounced in time to woo support back to the ruling Labour party after more than a decade in power.

But economists are unsure just how harsh the slowdown will be and what power the Bank of England has to stop it at a time when policymakers are equally worried about rising prices.

"We all know that 2007 was a good year for the UK economy and that 2008 will be a bad one," said Audrey Childe-Freeman, an economist at CIBC World Markets. "The question is just how bad."

Consumer confidence has fallen to its weakest level since 1993 when Britain was emerging from a deep recession, a GfK NOP survey showed on Friday, indicating that retail spending is set to slow markedly this year.

The once red-hot housing market is also starting to buckle. A survey from Nationwide showed house prices falling for a fifth straight month in March to give the lowest annual rate of inflation in 12 years.

That knocked shares in house builders such as Barratt Developments lower as investors fret about future earnings in the sector.

Despite lower official interest rates, banks are making it harder for would-be homebuyers to find affordable mortgage terms as the credit crunch makes money more expensive on financial markets.