Country Report United Kingdom May 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 until 2011-12, as the financial and household sectors undergo a process of balance-sheet adjustment.
• Real GDP is forecast to contract by 4% in 2009 and by 0.5% in 2010. Given the weak state of the global economy and the UK's macroeconomic imbalances, there is little to suggest a sustainable fast-paced recovery is on the horizon.
• The public finances will deteriorate at an alarming rate in 2009-10. This will necessitate a prolonged period later of higher taxes and public spending restraint.

Monthly review

• According to a rolling average of recent opinion polls, support for Labour in early May was running at 26%, down from 31% a month earlier, while support for the centre-right main opposition Conservative Party had risen to 45%.
• The Daily Telegraph newspaper published details showing widespread abuse of the parliamentary expenses system by MPs from all the main political parties. The affair reinforced the public's deepening distrust of politicians in general.
• The Bank of England (the central bank) announced an expansion of its asset-purchase programme financed by central bank reserves (so-called quantitative easing) by an additional 50bn (US$75bn) to a total of 125bn.
• According to Treasury data, the general government budget deficit widened to 6.3% of GDP in the 2008/09 financial year, up from 2.4% of GDP a year earlier.
• The government's 2009 budget forecasts a fiscal deficit of 12.4% of GDP in the 2009/10 financial year and one of 11.9% of GDP in 2010/11. The budget was widely criticised for its rather optimistic economic growth assumptions.
• Real GDP declined by 1.9% quarter on quarter in the first three months of 2009.