Country Report United Kingdom September 2009

Outlook for 2009-10

• After 11 years in office, the governing Labour Party faces a heavy defeat at the next general election (due by June 3rd 2010). The unpopularity of the prime minister, Gordon Brown, will militate against a dramatic Labour recovery.
• The Economist Intelligence Unit expects the opposition Conservatives to defeat Labour and gain a parliamentary majority. A hung parliament cannot be entirely 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 keep its policy rate at 0.5% until late 2010. Concerns over 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 forecast to contract by 4.5% in 2009, before rising by 0.3% in 2010. A "double-dip" recession is possible as stimulus measures fade, with domestic demand likely to remain weak and financial intermediation impaired.

Monthly review

• UK-US relations were strained following the decision by Scotland's nationalist government to release Abdelbaset al-Megrahi, a Libyan convicted of the 1988 Lockerbie bombing that killed 270 people (including 189 Americans).
• The controversial decision proved highly problematic for the prime minister. He refused to comment on whether the release was justified, raising speculation (so far unfounded) that some form of deal had been struck with Libya.
• As of September 10th the BoE had bought ??143.3bn (US$235bn) of government gilts and ??2.2bn in corporate assets as part of its quantitative easing programme. This equates to 11% of GDP or 20% of the total volume of outstanding gilts.
• Adair Turner, chairman of the UK's financial regulator, the Financial Services Authority, provoked controversy by suggesting that the City of London had grown too large and describing some of its activities as "socially useless".
• Real GDP fell by a revised 0.7% quarter on quarter in the April-June period, as more recent survey data pointed to a bottoming out of economic activity.

• Highlights
• Outlook for 2009-10: Domestic politics
• Outlook for 2009-10: In focus
• Outlook for 2009-10: International relations
• Outlook for 2009-10: Policy trends
• Outlook for 2009-10: Fiscal policy
• Outlook for 2009-10: Monetary policy
• Outlook for 2009-10: International assumptions
• Outlook for 2009-10: Economic growth
• Outlook for 2009-10: Inflation
• Outlook for 2009-10: Exchange rates
• Outlook for 2009-10: External sector
• Outlook for 2009-10: Forecast summary
• The political scene: Foreign-policy issues dominate during parliamentary break
• Economic policy: Bank of England is the most activist G7 central bank
• Economic policy: FSA chairman criticises "socially useless" City activities
• Economic policy: Public finances weaken further, as tax receipts slump
• Economic performance: No sign of a rapid rebound, as domestic demand plummets
• Economic performance: In focus
• Economic performance: Economy faces powerful headwinds
• Economic performance: Inflation steady, while public-sector earnings rise rapidly
• Data and charts: Annual data and forecast
• Data and charts: Quarterly data
• Data and charts: Monthly data
• Data and charts: Annual trends charts
• Data and charts: Monthly trends charts
• Data and charts: Comparative economic indicators
• Basic data
• Political structure