UK Economics
Highlights
Will aggressive fiscal retrenchment choke off the UK recovery?
The emergency Budget of late-June saw the new Chancellor, George Osborne, initiate a significant acceleration in the pace of fiscal tightening. Our modelling suggests that the Budget measures will damage short-term growth prospects but, other things being equal, the UK should avoid a double dip. Lower government borrowing should feed through into lower long-term interest rates, providing support to households and companies, while the fact that the Chancellor has 'back loaded' a significant proportion of the spending cuts means that there should be time for the recovery to become firmly entrenched before the deepest cuts begin to hit. However, there are a number of risks to the outlook. The government must first provide a credible plan for cutting departmental spending and then provide tangible evidence that it is achieving those cuts, if it is to keep markets onside. It will also be reliant on conditions outside its control remaining favourable, namely the Bank of England keeping monetary policy loose, the pound remaining weak and our most important trading partner, the Eurozone, weathering its own fiscal retrenchment.
21 July 2010
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Can the recovery in house prices be sustained?
Though the wider economy has seen a weak and patchy recovery since the autumn, the housing market has enjoyed a strong rebound. What's more, this rally has come in spite of a number of the key economic indicators of household's willingness and ability to purchase housing remaining unfavourable. The rebound appears to have been the result of an acute shortage in housing supply, but this has begun to unwind in recent months and, as a result, the market has started to cool. Looking forward the drivers of housing demand are set to remain unfavourable, with the recovery in GDP growth likely to be slow and unemployment set to edge up as the public spending cuts bite. The outlook for mortgage lending is also subdued and pressures on banks to recapitalise and concerns about the possibility of further writedowns will reinforce banks' risk aversion and ensure that credit remains scarce and expensive. As a result, we expect house prices to dip over the coming year.
21 July 2010
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UK Budget: An ambitious bid to repair the public finances
This was an ambitious bid to repair the public finances, with the Chancellor setting a target of returning the cyclically-adjusted current budget to balance by 2015/16 and then setting out plans to reach this target a year early. The additional tightening is split 77:23 in favour of spending cuts and history tells us that austerity packages which are focused on spending have the best chance of succeeding. In the contact of the hand that the Chancellor had been dealt, this looks like a well crafted Budget. But we are concerned that the OBR has under-estimated the damage that the tightening will do to near-term growth prospects - while the effects are unlikely to be sufficient to push the economy back towards recession, it does suggest that there is some upside risk to the borrowing forecasts.
22 June 2010
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