Country Report United Kingdom February 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. At this stage, however, a hung parliament cannot be discounted.
• 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 inevitable.
• The UK banking sector remains in a precarious state. Powerful vested interests could delay the implementation of necessary measures to clean up the financial system. The full nationalisation of some large UK banks is possible.
• Real GDP is forecast to contract by 3.6% in 2009 and by 1.1% in 2010. We do not expect a sustained recovery in bank lending until 2011-12, reflecting a prolonged period of private-sector balance-sheet adjustment.
• The public finances will deteriorate sharply. As pressure on the state balance sheet increases, so will concerns over the UK meeting its debt obligations. With interest rates close to zero, policymakers will engage in quantitative easing.

Monthly review

• Opinion polls during January and early February showed Labour trailing the Conservative Party by more than 10 percentage points.
• Around 6,000 workers across the UK staged a series of walk-outs in protest at a foreign contractor's decision only to employ foreign staff at an oil refinery.
• In January the government unveiled a second financial rescue package, which included a vaguely defined state-backed insurance scheme to underwrite banks' toxic assets, and a new £50bn (US$73bn) fund to purchase corporate debt.
• The Bank of England (the central bank) cut interest rates to 1% on February 5th, a new all-time low, and indicated that a range of unconventional measures to target the money supply directly were now being considered.
• The government unveiled a £2.3bn support package for the ailing automotive industry, which has seen an alarming slump in demand in recent months.
• Real GDP contracted by a provisional 1.5% in the final quarter of 2008, the sharpest quarterly fall in 28 years. Unemployment rose to 1.97m in December.

Source: Country Report

This report covers the following industry codes:
SIC Code: 53;59;22;48;47
NAICS Code: 44;313;517;48