Country Report United Kingdom April 2009

Outlook for 2009-10

• The scale of the global financial crisis and its effects increase the risks attached to the Economist Intelligence Unit's political, policy and economic forecasts. A deeper recession, more radical policy moves and social instability are possible.
• After more than a decade in office, the governing Labour Party is struggling to respond to the escalating economic turmoil. Support for Labour and the prime minister, Gordon Brown, is expected to fall further as the recession deepens.
• We expect the main opposition Conservative Party to defeat Labour at the next election (due by May 2010) and achieve a modest overall parliamentary majority. A hung parliament cannot be discounted, however.
• The government's response to the financial crisis has huge policy implications for years to come, in terms of the state's mounting financial commitments and its expanding role in the economy. Further state intervention is likely.
• Despite huge state-backed financial support, UK banks remain in a precarious state. Powerful vested interests and political concerns mean the fundamental issue of cleansing the banks' balance sheets is unlikely fully to be addressed.
• Real GDP is forecast to contract by 4% in 2009 and by 1.1% in 2010. We do not expect a sustained recovery in bank lending until at least 2011-12, following a prolonged period of private-sector balance-sheet adjustment.
• The public finances will deteriorate at an alarming rate in 2009-10. As pressure on the state balance sheet increases, so will concerns over the UK meeting its debt obligations. The impact of quantitative easing remains highly uncertain.

Monthly review

• The government and Mr Brown have seen a modest bounce in their approval ratings following the G20 summit of leading countries in London.
• The summit was widely reported in the media as a success, but the measures agreed will do little to address the immediate challenges facing the global economybanks' toxic assets, rising unemployment and contracting demand.
• Net public-sector borrowing for the 2008/09 financial year is set to total 95bn (equivalent to 6.5% of GDP, the highest share of national income since 1993/94).
• In 2008/09 the government is estimated to have issued over 150bn of new government debt (gilts), far above earlier forecasts and almost triple the amount issued in recent years. Debt issuance will be even higher in 2009/10.
• According to a central bank survey of credit conditions, there are tentative signs that credit availability for corporate borrowers is starting to improve.
• Unemployment rose sharply in the three months to January. CPI inflation remained resilient in February, as wage growth slowed. Export demand fell.

This report covers the following industry codes:
SIC Code: 60;10
NAICS Code: 52;212