Country Report United Kingdom October 2009

Outlook for 2010-11

• After 12 years in office, the governing Labour Party faces defeat at the general election (expected in early May 2010). The unpopularity of the prime minister, Gordon Brown, will militate against a dramatic Labour recovery.
• The Economist Intelligence Unit expects the opposition Conservative Party to defeat Labour and gain a modest parliamentary majority. A hung parliament cannot be discounted, however, 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 risks sowing the seeds of the next crisis.
• Concerns about the dire state of the UK 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 late 2010. Concerns about bond market developments could lead the BoE to raise rates before exiting from its more unorthodox policy measures.
• Despite the huge level of state-backed financial support, the UK 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 contract by 4.5% in 2009, before rising by 0.6% in 2010 and 1% in 2011. There is a risk of a "double-dip" in output as stimulus measures fade, given the weakness of domestic demand and a fragile banking sector.

Monthly review

• A rolling average of recent opinion polls showed support for the Conservatives at 40% in late September, with Labour on 25% and the Liberal Democrats 19%.
• At Labour's annual party conference, Mr Brown's keynote speech was aimed at mobilising Labour's core vote and underlining his recent shift in concern for the "squeezed middle classes", with a focus on combating anti-social behaviour.
• His criticism of bankers and the "bankrupt ideology" of free markets carried a populist tone that jarred with Mr Brown's previous decade-long championing of the City of London and the UK's "light-touch" financial regulation.
• The BoE governor, Mervyn King, indicated that the Bank was in no hurry to "exit" from its loose monetary stance given the large output gap in the economy.
• Government borrowing continued to rise sharply in August. The government announced an extension to the popular car scrappage incentive scheme.
• Real GDP contracted by a revised 0.6% in the second quarter, while the current-account deficit widened sharply. The unemployment rate rose to 7.9% in July.

This report covers the following industry codes:
SIC Code: 49;48;47;15
NAICS Code: 22;517;48;23