Country Report United Kingdom July 2009

Outlook for 2009-10

• Data suggest that the worst of the global economic freefall may be ending, but there are still clear risks to the Economist Intelligence Unit's political, policy and economic forecasts. A deeper recession and social instability are possible.
• After 11 years in office, the governing Labour Party faces defeat at the next general election (due by June 2010). The unpopularity of the prime minister, Gordon Brown, will militate against Labour pulling off a dramatic recovery.
• We expect the opposition Conservative Party to defeat Labour at the election and gain a modest overall parliamentary majority. A hung parliament cannot be entirely discounted, however, with the Liberal Democrats as kingmaker.
• The government's response to the financial crisis has huge policy implications for years to come, in terms of the state's considerable financial commitments and its expanding role in the economy. Further state intervention is possible.
• Despite huge state-backed financial support, UK banks remain in a precarious state. Credit availability will remain constrained for some time, as the private sector undergoes a rigorous process of balance-sheet adjustment.
• Real GDP is forecast to contract by 4.4% in 2009 and by 0.5% in 2010. Given the weak state of the global economy and the macroeconomic imbalances in the UK, hopes for a sustainable fast-paced recovery are likely to be dashed.
• Concerns about the fiscal position will increasingly dominate policy debate as the public finances deteriorate at an alarming rate in 2009-10. This will necessitate a prolonged period later of higher taxes and public spending restraint.

Monthly review

• In late June Mr Brown sought to give his tired government a renewed sense of purpose by outlining Labour's legislative agenda for the next year.
• Dubbed a "radical vision" by Mr Brown, the report lacked a strong domestic narrative, containing a jumble of vague initiatives??