Country Report United Kingdom July 2008

Outlook for 2008-09

• The governing Labour Party appears bereft of ideas and direction, with the embattled prime minister, Gordon Brown, struggling to exert his authority in the face of growing party indiscipline and voter discontent.
• Labour faces a key by-election vote in Glasgow East (Scotland)—traditionally one of the party's safest seats—in late July. A Labour defeat would place more pressure on the prime minister and could prompt a leadership challenge.
• The main opposition Conservative Party is in a strong position, but will face increasing scrutiny as the general election, due by May 2010, draws closer.
• A Conservative election victory seems likely, but the party has yet to establish itself as a government in waiting, owing its position in the polls more to voters' disenchantment with Labour than to enthusiasm for the Conservatives.
• Tax revenue growth is slowing, in response to weakening consumer demand and deteriorating conditions in the financial and property sectors. The public finances will weaken further, showing a deficit of 4.4% of GDP in 2009.
• Inflationary pressures will rise further over the short term, but are forecast to ease gradually from late 2008. This should offer scope for the Bank of England (BoE, the central bank) to cut its main policy rate to 3.75% by end-2009.
• With private consumption growth and industrial output set to slow more sharply than previously expected, the Economist Intelligence Unit has revised downwards its GDP growth forecasts to 1.3% in 2008 and just 0.4% in 2009.

Monthly review

• The government's weakness has encouraged special interest groups to raise their demands. Motoring groups mounted a series of protests to press for lower fuel prices and 400,000 council workers voted to strike over low pay.
• The BoE left interest rates unchanged at 5% in July in the face of strengthening inflationary pressures, despite signs of a rapidly worsening economic outlook.
• Data on the UK's weakening housing market showed a further fall in property prices in June, a sharp slump in new mortgage approvals and a rapid decline in the number of property transactions since the start of the year.
• The economic downturn is depressing tax revenue, with central government receipts in April-May rising at a slower pace than budget projections. This was despite rising receipts from North Sea oil production, as oil prices rose further.
• Purchasing managers' indices (PMIs) for June showed a contraction in activity in the services, manufacturing and construction sectors.
• The current-account deficit narrowed sharply in the first quarter, mainly owing to lower profits from UK investments of foreign companies.

Source: Country Report