United Kingdom: reducing the deficit and maintaining growth

The concern in United Kingdom is that any aggressive action to reduce the deficit may push the economy into the dreaded double dip scenario and a return to recession.

Madrid - 02-ago-2010

The UKs GDP grew 0.4% in Q4 of 2009 and a further 0.3% in Q1 of 2010. This return to growth remains fragile, and some analysts now believe that earlier forecasts for 2010 GDP growth of between 1.2% and 1.4% may have been a little optimistic. Many had hoped that the weakness of Sterling against other major currencies would have had a positive impact on exports, but so far the impact has been lower than expected.

 With over half of the UKs exports going to Europe and around 17% to the US, the delicate recovery in both of these key areas is limiting export opportunities. It also appears that UK exporters have decided to retain margin rather than reduce their prices - which would potentially have stimulated higher levels of turnover. Figures from the Office for National Statistics [ONS] show that the trade deficit rose from £ 8.3 billion in Q4 of 2009 to £ 9.5 billion in the first quarter of 2010, on the back of flat export figures and a 1.4% increase in imports.

The first quarter of this year saw 4,082 compulsory liquidations and creditors voluntary liquidations in England and Wales. While this figure is high, it was an improvement of 8.4% on the previous quarter and a decrease of 17.8% on the same period last year. Crédito y Caución continues to see failures in all of the main industries, but there is no doubt that construction, leisure/hotels and business services were the most problematic areas during the month of May, and this is an ongoing trend.

The last report on UK highlighted the significant fall in the availability of credit to businesses since the onset of the financial crisis, and the indications are that this is still the case. Official data on lending by all UK resident banks and building societies showed that the stock of lending to businesses contracted £ 3.2 billion in March. There is slightly better news in that the data suggests that syndicated loan facilities granted to UK businesses rose for both non-resident and UK resident banks in Q1 of 2010. However, this increase has to be viewed into context, as it still remains well below the values seen in the period 2003-2007.

The next few months will be particularly interesting, as a significant number of loan facilities are due to mature before the end of 2010. No doubt, financial institutions will be looking closely to ensure that they invest in the most favourable opportunities with the right level of risk/reward.

Emergency budget

The new coalition government wasted no time in announcing its immediate plans to reduce the deficit, in its recent emergency budget. With a deficit of nearly £ 163 billion and national debt still likely to peak at £ 1.4 trillion, there are clearly going to be some very tough times ahead for UK consumers and businesses alike. The Chancellor outlined detailed plans to cut the budget deficit to zero in the next six years, including an increase in VAT from 17.5% to 20% from 4th Jan 2011, a public sector pay freeze, an increase in the state pension age to 66 and a sizeable decrease in public spending. However, there are still concerns that this combination of increased taxation and improved efficiencies - spending cuts - will not be enough to deliver the required level of benefits within the timeframe specified. Against this backdrop, the real concern is that any aggressive action to reduce the deficit may ultimately push the UK economy into the dreaded double dip scenario and a return to recession.

The immediate impact on the UK economy will be from the coalition Governments decision to cut public spending. Recent announcements have already confirmed the cancellation of 12 projects totalling £ 2 billion that had been agreed by the previous administration. A further £ 8.5 billion worth of projects have been put on hold and an additional 217 projects - worth around £ 34 billion - that had been approved in the last three months of the last administration are also known to be under review. Undoubtedly, the cancellation/postponement of contracts of this size will have a detrimental effect on a number of businesses/sectors operating in the UK -construction, engineering, IT, consultants- with a consequent impact on job security and creation.

The UK may be out of recession, but a return to a pre-recession environment appears to be nothing more than a distant light at the end of a fairly long tunnel.

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