Forget the missing discs, a bank run or even the latest party funding scandal, British Prime Minister Gordon Brown's biggest challenge is the economy and what happens to the nation's once-booming housing market.

Brown hopes the political storm will pass and Britons will once again put their trust in a man credited for a decade of low inflation and steady growth, but unfortunately for him the economy is not going all his way.

Five months after taking over from Tony Blair, Brown is having a really tough time as his Labour government lurches from one scandal to the next.

In September, mortgage lender Northern Rock ran into trouble, prompting the first run on a British bank in 140 years. Last week, the government owned up to losing the personal details of half the country in the post and on Monday, the Labour Party's general secretary quit over anonymous donations.

Retired military chiefs have accused Brown of putting soldiers' lives at risk by not giving the armed forces enough cash. The opposition Conservatives struck gold in the polls with a pledge to cut inheritance tax and duty on first homes.

Brown's honeymoon double-digit lead over the Conservatives after succeeding Blair has turned into an equally impressive deficit in the latest opinion polls.

"This is a government on the rocks," Conservative leader David Cameron gleefully told business leaders in London when only two months ago it was his own job on the line as Brown considered calling an early election.

But polls are volatile and Brown does not have to call an election until 2010. He has a solid majority in parliament and no serious Labour rivals. Party sources say events will always get in the way, it is how you react to them that counts.

"One of the tests of the next few months for the British economy and for Britain will be whether ... we maintain the stability and growth of the British economy," Brown said.

"For the British public that is going to be a bigger test of whether the government is performing well for them than some of the other tests that are laid before us," he said.

But the Bank of England has predicted a sharp slowdown next year and even Brown admitted this weekend that the trouble that started in the U.S. housing market would soon spread to Europe.

Brown was finance minister for a decade before becoming prime minister and the British economy grew continuously under his watch but central bank Governor Mervyn King predicts a much rockier ride ahead.

That was a key reason why some Brown allies wanted to hold an election this year, three years earlier than required.

One problem is that interest rates can't come down as much as they did following the collapse of the dotcom boom and in the aftermath of the Sept 11 attack on the US because policymakers are worried about rising inflation.

"The backdrop to our attempts to keep inflation in line with target is less favourable then it has been," the central bank's chief economist, Charles Bean, said.

For a start, oil prices are nearing $100 a barrel. Add to that, the disinflationary impact of economies like India and China producing more goods has probably run its course.

Nor does the government have much scope to boost the economy through huge fiscal boosts as the public finances are tight.

The troubles in financial markets, however, are not over yet and policymakers around the world are worried that economic growth will turn out lower than already-weak predictions.

Bean and other Bank of England policymakers have been warning that there could be more bad news to come as banks keep announcing multi-billion dollar losses because of investments made in the US sub-prime mortgage market.

The big worry is that bank losses lead to much tighter lending conditions and increase pressure on Britain's housing market which is slowing fast after years of double-digit gro