Country Report United Kingdom November 2009

Outlook for 2010-11

• After 12 years in government, the Labour Party continues to struggle in the polls and faces defeat at the next general election (likely in early May 2010).
• The Economist Intelligence Unit expects the opposition Conservative Party to gain a modest overall parliamentary majority at the election. However, a hung parliament cannot be discounted, with the Liberal Democrats as kingmaker.
• The unprecedented policy response, at home and abroad, has stabilised the financial markets, but has huge medium-term implications. Transferring banks' balance-sheet risk to the public sector could sow the seeds of the next crisis.
• Concerns about the dire state of the public finances will dominate policy debate, as the fiscal deficit and public debt rise to post-war record levels. This will necessitate higher taxes and deep spending cuts. Industrial unrest is likely.
• We expect the Bank of England (BoE, the central bank) to start raising its policy rate from early 2011. Concerns about gilts market volatility could lead the BoE to raise rates before exiting from more unorthodox policy measures.
• Despite the huge state-backed financial support, the banking sector remains in a precarious condition. Credit availability will remain constrained, as private-sector balance sheets are rebuilt and capital positions strengthened.
• Real GDP is expected to decline by 4.6% in 2009, before rising by 0.6% in 2010 and 1% in 2011. A significant risk is of a "double dip" in output as stimulus measures fade, given the weakness of demand and the fragile banking sector.

Monthly review

• The shadow chancellor, George Osborne, gave an important speech to his party's annual conference, establishing a seriousness of purpose regarding fiscal consolidation that, until then, had been lacking from both main parties.
• That said, measures proposed as part of a spending clampdown would have only a modest impact in plugging the gaping hole in the public finances.
• A rolling average of recent opinion polls puts support for the Conservatives at 41% in late October, with Labour on 27% and the Liberal Democrats on 19%.
• The BoE is nearing the £175bn (US$288bn) limit of its unconventional quantitative easing programme. It will decide in November whether to pause its asset purchases or expand them further, with the latter looking more likely.
• Differences between the BoE, on the one hand, and the government and the Financial Services Authority (FSA), on the other hand, over how to prevent future financial crises deepened in October.
• A preliminary estimate showed that the economy contracted by 0.4% in the third quarter of 2009, the sixth consecutive quarter of decline.

This report covers the following industry codes:
SIC Code: 37;49;53;60;80;89
NAICS Code: 336;22;44;52;62;81