Country Report United Kingdom December 2008

Outlook for 2009-10

• The governing Labour Party will continue to focus on managing the deepening financial and economic crisis. Support for the prime minister, Gordon Brown, has risen in recent months, but this may not continue as the slump deepens.
• The Economist Intelligence Unit expects Mr Brown to remain prime minister until the general election, which must be held by May 2010. A snap election in early 2009 cannot be ruled out, but is unlikely given the economic turmoil.
• We forecast that the main opposition Conservative Party will emerge as the largest party at the election and gain a modest overall parliamentary majority.
• The bank bail-out will have huge policy implications for many years, in terms of the state's mounting fiscal commitments and its wider role in the economy. Further taxpayer-funded intervention to underpin the economy is inevitable.
• Economic prospects at home and abroad are continuing to deteriorate rapidly as the fallout from the financial crisis spreads to the real economy. Real GDP in the UK is now forecast to contract by 2.5% in 2009 and by 0.9% in 2010.
• We do not expect a sustained recovery in bank lending until 2011-12, reflecting a prolonged period of balance-sheet adjustment. Interest rates across developed economies are heading towards zero, paving the way for quantitative easing.
• The UK's already fragile fiscal position will deteriorate sharply, adding to the pressure on the government's balance sheet. There is a risk that investors could lose confidence in the UK's ability to meet its sovereign debt obligations.

Monthly review

• The Labour Party continued to narrow the gap in opinion polls with the main opposition Conservative Party in November, despite the economic downturn.
• The government announced a 20bn (US$30bn) stimulus package in its annual pre-budget report. Among a raft of fairly modest measures, the main element was an interim cut in the value-added tax (VAT) rate from 17.5% to 15%.
• The government's revised projections for the public finances show a steep rise in the fiscal deficit in 2009-10 and only a gradual improvement thereafter, with the budget expected to remain in the red until at least 2015-16.
• A huge rise in public borrowing is planned in the coming years. In an effort to assuage investor concerns over fiscal sustainability, the government plans to raise taxes and impose severe public spending restraint from 2010 onwards.
• The Bank of England (the central bank) cut its base rate to 2% on December 4th, the lowest level in 57 years, but banks remained unwilling to extend credit.
• Annual consumer inflation slowed to 4.5% in October, as price pressures eased. Sterling came under heavy pressure, falling to an all-time low against the euro.

Source: Country Report