UK economy slows as Europe's 'dark clouds' gather

The U.K.'s economic growth slowed more than expected in the fourth quarter of 2014, data showed Tuesday, as the euro zone's troubles weighed.

According to preliminary data from Office of National Statistics (ONS), Britain's gross domestic product (GDP) expanded by 0.5 percent in the fourth quarter on the previous three months.

This was below a forecast of 0.6 percent from analysts polled by Reuters, and marked a slowdown from 0.7 percent growth in the third quarter.

Year-on-year, the economy grew by 2.6 percent, however, representing the strongest annual growth since 2007, when it was also 2.6 percent, the ONS said.

The U.K. economy has shown itself to be one the more robust in northern Europe and beyond over the past year, making today's data something of a concern.

"Economic growth hardly set the world alight in the fourth quarter, and it's clear that it is slowing," Nancy Curtin, chief investment officer of Close Brothers Asset Management, said in a note.

Whereas Naeem Aslam, market analyst at Ava Trade, warned that the U.K. economy was "surrounded by dark clouds of the struggling economies (in the euro zone)."

U.K. OK?

Skyline of London
Simon Dawson | Bloomberg | Getty Images
Skyline of London

But despite the latest data, Andrew Sentence, senior economic adviser at PwC and former Bank of England Monetary Policy Committee member, told CNBC that he believed the country's economy would continue to show momentum.

"We've got tension between what's affecting the external side of the economy – such as slow growth in the euro area -- and actually quite resilient domestic demand in retail sales, and investment has quite a bit of momentum," he told CNBC Europe's "Squawk Box" Tuesday.

"The rate of growth is still above what I think is the long-run trend, which is about 2 percent per annum, so we're still going to see unemployment coming down. There's a lot of evidence that the economy is doing OK."

Unemployment fell to its lowest level in more than six years in the three months to November, hitting 5.8 percent, and wage growth outpaced inflation.

Chris Williamson, chief economist at Markit, said he believed there were grounds for optimism about the U.K.

"There are lots of reasons to believe that growth could pick up again in a favorable environment of rising wages, low inflation and low interest rates, meaning the U.K. should enjoy another year of solid economic growth in 2015," he wrote in a note Tuesday.

But Williamson warned that the outlook faced some risks, such as the euro zone's slowdown and a dependence on consumer-driven growth.

"Policymakers will need to be watching these risks closely and the concern is that, with interest rates already at a record low, options to effectively stimulate the U.K. economy are limited if further action is required," he said.

At its latest policy meeting, the Bank of England kept interest rates unchanged at 0.5 percent as concerns over the euro zone economy and the region's slide into deflation saw all members of the bank's MPC vote to hold off raising rates.

But this could be a risky move, according to PwC's Sentance.

"The danger with keeping very low-level interest rates is that you're going to encourage a new wave of debt to add to the problems we inherited before the crisis," he said.

"I think if want to get a gradual rise in interest rates we should have been raising them by now."

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt