2010 will be a difficult year for the UK economy. After the deepest recession since the 1930s, the outlook is for a sluggish recovery. Though recovery is welcome, it still leaves the problem of spare capacity, high unemployment and record levels of peactime government borrowing. It will be a difficult tightrope between boosting economic growth whilst keeping borrowing under manageable levels.
Economic Growth
Economic Growth
Source: ONS
The economy is expected to recover in 2010, but give the depth of the recession, output is well below full capacity. It would take a long period of economic growth to overcome the spare capacity.
Forecasts for Growth in 2010
Forecasts Growth UK 2010
Source: HM Treasury – forecasts for UK economy December 2009
Factors Favouring Strong Economic Recovery
- Unprecedented monetary policy of 0.5% interest rates and quantitative easing
- 20% depreciation in the Value of Sterling helps exporters and domestic demand
- Signs of Stronger recovery in Europe – our main trading partners
- House price falls have ended in 2009, this should help stabilise wealth and confidence
Factors Undermining Economic Recovery
- Size of Budget deficit is putting government under pressure to rein in borrowing through higher taxes or lower spending. This deflationary fiscal policy will reduce demand and could damage an economic recovery.
- Signs that British consumers are becoming more attached to saving and are reluctant to spend
- Balance Sheets of Banks is still poor leading to reluctance on their part to lend.
- Possibility of second fall in house prices.
Unemployment
Source: ONS
Unemployment is the most serious problem facing economy with over 2.5 million unemployed. However, as we noted here – Why is Unemployment not higher? – the rise in unemployment could have been expected to be much higher given depth of recession
Inflation
Inflation is currently 1.9% (Dec 09) – just below the government’s target of 2%. Inflation forecasts for 2010 suggest cost push factors (tax rises, oil price rises) may push CPI above the inflation target. However, this rise in inflation is likely to be temporary and doesn’t reflect an underlying spare capacity in the economy.
Inflation
In fact there is still a worry over deflationary pressure. Given level of spare capacity and unemployment rate, inflation is not a significant concern for 2010.
Interest rates are likely to remain low throughout 2010
Balance of Payments
Source: ONS retrieved Dec 14th 2009
One of the surprise of the UK economy is the persistent current account deficit despite -
- Depreciation in the pound
- fall in consumer spending.
See: Reasons for persistent UK current account deficit
Government Borrowing
source: ONS
The rapid rise in Government borrowing has been one of the most unwelcome features of this recession. Tax revenues have collapsed after the rise in unemployment, fall in house prices and fall in wage growth. At the same time, spending on unemployment benefits has increased. This cyclical deficit has highlighted the underlying structural deficit.
One of the challenges of 2010 and 2011 will be reassuring markets that the government have a realistic plan to bring borrowing under control without endangering the economic recovery. If markets don’t trust plans to reduce borrowing, the UK could have its AAA credit rating downgraded – this would make it more difficult and expensive to borrow. But, if taxes rise too quickly it could cause a fall in GDP.
National Debt is currently £830bn or just under 60% of GDP. But, with a budget deficit of approx £180bn forecast for 2010, this will rise rapidly.
UK Borrowing
Sterling
Value of Sterling
Sterling has been weak since 2007, reflecting the fact the UK economy has been one of the weakest performers out of the OECD. It would take a strong recovery and prospect of higher interest rates to strengthen sterling.
Financial Market Liquidity
Though Bank liquidity has improved from the depths of the credit crunch, lending conditions are still far from normal hampering investment and the housing market.
Related
3 comments ↓
You reap what you sow, the increase in VAT is likely to lead to the recovery remaining sluggish and the economy remaining in recession or flat lining in the 4th quarter before falling back in to recession in 2010.
The catalyst the international credit agencies will downgrade the UK’s coveted AAA Plus credit rating making debt more expensive to service, this leads to a run on the pound because Labour are unwilling to tackle effectively the national debt pre general election.
SHould Brown succeed at getting back in in a hung parliament I think the UK economy will not only be in for a horrible half a decade anyway, but the financial markets will collapse. You reap what you sow Mr Brown, you banished Boom and bust in your head only, the reality is the UK’s economic perfornance in the 00 decade was the worst since the 1920’s
A vote for labour is a vote for economic ruin
Well technically and only just the longest post war recession ended on Tuesday 26/01/10, and the economy grew by a breathtaking 0.1 per cent which is hardly anything at all really and certainly nothing to pop the champagne open. The economy in the UK shrank from the last time it grew at the end of March 2008 until it existed recession in December 2009 by 6 per cent from peak to trough, the worst recession on record and far outweighing the worst recession under the Conservatives in the 1980’s.
Unemployment hasn’t risen so far as fast as it should of why? Employers are keeping staff on but on reduced hours and pay, Part time employment in the UK has risen by over a million whilst full time jobs have fallen by 750,000.
The future, isn’t good for the UK.
At some stage the deficit has to be tackled, we have two choices so far, Labour’s do nothing at all which will bankrupt Britain as the credit rating of the country’s interest rate gets cut from AAA plus and the pound falls making your mortgage and borrowings of everyone more expensive , or the opposite policy of the tories which if implemented would lead to another recession.
The tories plan to cut spending quick and fast, with the economy so fragily out of recession any Conservative administration will have to re-think that policy, the deficit needs to be cut but at a pace that doesn’t lead to renewed downturn and to total loss of confidence.
If I was in government as treasury minister, don’t raised VAT to 20 per cent, do raise direct taxes eg income tax by 3p, do tax the banks on a three year windfall or better still make them pay the bailed out money back over a 1 to 5 year period, and do provide incentives to private sector employment growth whilst reigning back the bloated public sector.
I sincerely hope that the flawed US model of the UK economy ends and the UK adopts the German economy model but time will tell. Cadbury was needlessly sold to a foreign company that will suck corporate taxes out of Britain. Germany would never allow that.
What will happen ! Time will tell but Britain is in for a rough decade !
[...] UK economy 2010 [...]
Leave a Comment