Country Report United Kingdom June 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 party indiscipline and voter discontent.
• With the economic outlook deteriorating, resentment growing over the rising tax burden, and the prime minister unable to connect with the electorate, Labour will find it difficult to regain the trust of voters.
• The main opposition Conservative Party is in a strong position and has the momentum, but will face increasing scrutiny as the next general election, due by May 2010, draws closer. The outcome of the election is still uncertain.
• Slowing economic activity and a weak fiscal position will make it difficult for the government to deliver on its promise of further improvements in public services, which could be slow to materialise.
• Headline inflation is forecast to remain over 3% this year—well above the 2% target of the Bank of England (BoE, the central bank), before easing back to an average of 2.5% in 2009. A modest cut in interest rates is expected next year.
• Real GDP growth is forecast to slow from 3% in 2007 to 1.7% in 2008 and 1.4% in 2009, as the impact of the international credit crunch dampens growth in the important financial services sector and raises the risk premiums on lending.

Monthly review

• Opinion polls continued to make grim reading for Labour, whose support is now more than 20 percentage points below that of the Conservatives.
• On June 11th the government narrowly won a House of Commons vote on extending the period of pre-charge detention of terrorist suspects from 28 to 42 days. With 36 Labour MPs voting against, it was a pyrrhic victory for Mr Brown.
• The Conservatives were rocked by the sudden resignation of David Davis, the shadow home secretary. He stood down as an MP in protest at the erosion of civil liberties in the UK, but plans to campaign on this issue to regain his seat.
• In response to the rise in inflationary pressures (and inflationary expectations) in recent months, the financial markets have priced out any possibility of a further cut in interest rates in 2008.
• The Treasury has delayed publication of its plans for reform of the corporate tax regime, admitting that further consultation is required with multinationals.
• According to the Nationwide index, average property prices fell at their fastest rate for 17 years in May. The number of mortgage approvals fell to a record low.
• Headline inflation rose to 3.3% in May, prompting the BoE governor to write an open letter to the chancellor detailing how he plans to restore price stability.