Country Report United Kingdom March 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. A hung parliament cannot be entirely discounted, however.
• 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 expected.
• Despite huge state-backed financial support, the UK banking sector remains in a precarious state. Powerful vested interests and political considerations mean insolvency concerns and restructuring issues are unlikely to be fully addressed.
• Real GDP is forecast to contract by 3.8% in 2009 and by 1.1% in 2010. We do not expect a sustained recovery in bank lending until at least 2011-12, following a prolonged period of private-sector balance-sheet adjustment.
• The public finances will deteriorate at an alarming rate in 2009-10. As pressure on the state balance sheet increases, so will concerns over the UK meeting its debt obligations. The impact of quantitative easing (QE) is highly uncertain.

Monthly review

• The prime minister, Mr Brown, looks increasingly embattled. His defiant stance over his handling of the economy has brought him into conflict with party members calling for some contrition to try to boost Labour's standing.
• The Bank of England (BoE, the central bank) cut its official base rate to 0.5% in early March and announced the start of a major programme of QEthe injection of new money into the economy to boost wider credit demand.
• The BoE will inject 75bn (US$104bn) in the next three months by purchasing a range of public- and private-sector assets (mostly government debt, or gilts).
• The state now holds a large majority share in two of the UK's largest banksRBS and Lloyds. Taxpayers are to insure 585bn of the banks' most toxic assets under the government's asset protection scheme. There is a risk of heavy losses.
• Leading economic indicators pointed to another contraction in GDP of about 1.5% in the first quarter. Industrial output slumped in February. Annual CPI inflation eased modestly to 3% in January. Sterling stabilised against the euro.

This report covers the following industry codes:
SIC Code: 70
NAICS Code: 72