United Kingdom
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Country Report United Kingdom United Kingdom at a glance: 2005-06 OVERVIEW Parliament was dissolved in April and a general election will be held on May 5th. Although the contest is the most open since 1992, the governing Labour Party remains strong favourite to be re-elected. The greatest uncertainty centres on the size of Labourrs parliamentary majority, which will be influenced by the turnout and the incidence of tactical voting. The Economist Intelligence Unit expects Labourrs majority to be cut to around 100 seats. Although this will provide it with a comfortable working majority, the government is likely to encounter mounting political difficulties early in its third term. The most pressing challenge on the economic policy front will be to reconcile Labourrs commitment to increase public spending on health and education with its self-imposed budgetary rules. This will only be possible by proceeding with further increases in taxation. The cycle of monetary tightening is at, or close to, its peak, and official interest rates are likely to fall in late 2005 and 2006. Real GDP growth is forecast to slow from 3.1% in 2004 to 2.3% in 2005 and 1.9% in 2006 as the consumer boom that began in 1996 comes to an end. Higher producer prices exert upward pressure on consumer prices, but the headline rate of inflation will remain below the governmentrs central target of 2% in both 2005 and 2006. The trade deficit will widen in 2005, but decline in 2006 as domestic demand slows. Key changes from last month Political outlook • Tony Blair should be re-elected on May 5th, but his chances of remaining prime minister beyond 2006 will be enhanced if French voters reject the EU constitution on May 29th. Economic policy outlook • Weak retail sales in early 2005, allied to growing evidence of a slowdown in the housing market, have reduced the likelihood of a further rise in official interest rates in 2005. Economic forecast • Weakening leading indicators have encouraged us to trim our forecast for real GDP growth in 2005 to 2.3% (down from 2.4% last month). April 2005 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group. 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United Kingdom 1 Contents United Kingdom 3 Summary 4 Political structure 5 Economic structure 5 Annual indicators 6 Quarterly indicators 7 Outlook for 2005-06 7 Political outlook 8 Economic policy outlook 10 Economic forecast 13 The political scene 17 Economic policy 20 The domestic economy 20 Output and demand 24 Sectoral trends 25 Employment, wages and prices 28 Financial indicators 30 Foreign trade and payments List of tables 10 International assumptions summary 11 Gross domestic product by expenditure 13 Forecast summary 18 Summary of public-sector finances 19 Sectoral breakdown of net borrowing 20 Components of gross domestic product 21 Components of gross domestic product 24 Services: gross value added 25 Non-services output 26 Inflation 28 Employment and unemployment 29 Exchange rates 29 Interest rates 30 Stockmarket indicators 31 Trade in goods 32 Current account Country Report April 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 2 United Kingdom List of figures 13 Gross domestic product 13 Consumer price inflation 20 Real GDP growth and household consumption 23 Gross fixed capital formation and capacity utilisation in manufacturing Country Report April 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 United Kingdom 3 United Kingdom April 2005 Summary Outlook for 2005-06 The governing Labour Party is forecast to be re-elected on May 5th, albeit with a reduced parliamentary majority. Public spending will continue to rise faster than GDP as the government strives to improve key services such as health and education, but further increases in taxes will be necessary to prevent a further deterioration in the public finances. Real GDP growth will slow to 2.3% in 2005 and 1.9% in 2006. The political scene The prime minister, Tony Blair, dissolved parliament in early April, over a year before the end of the full term. The forthcoming general election is the most uncertain since 1992, but constituency boundaries establish a strong bias in Labour’s favour. Labour should be returned to office with a parliamentary majority of around 100. Economic policy The chancellor the exchequer, Gordon Brown, presented a pre-electoral budget on March 16th. The budget contained some carefully targeted measures aimed at pensioners and working families, which were paid for by fiscal drag and rises in excise duties. The overall macroeconomic impact of the 2005/06 budget is neutral. The Bank of England (the central bank) left official interest rates on hold during the first quarter of 2005. The domestic economy In the final three months of 2004, real GDP grew by 0.7% quarter on quarter and by 2.9% year on year. This meant that over 2004 as a whole real GDP grew by 3.1%, comfortably the fastest rate among the EU’s four largest member states. However, consumer spending, which has provided the main support to activity since 1996, slowed sharply in the final quarter of 2004 and leading indicators suggest that it remained weak in early 2005. Surging producer prices pushed up inflation up to 1.6% in early 2005. Employment continued to grow in the three months to January 2005, not sufficiently strongly to push down the rate of unemployment which remained at 4.7% (ILO measure). Sterling strengthened in the first quarter of 2005. Although long-term interest rates rose in the first three months of 2005, the yield curve remained inverted. Equity prices rose during the first quarter. Foreign trade and payments The UK’s trade deficit widened in the final quarter of 2004, but the deficit on the current account fell thanks to higher surpluses on the investment income and services accounts. Over 2004 as a whole, the trade and current-account deficits widened. Editors: Philip Whyte (editor); Dan OrBrien (consulting editor) Editorial closing date: April 15th 2005 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule Country Report April 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 4 United Kingdom Political structure Official name United Kingdom of Great Britain and Northern Ireland Form of state Parliamentary monarchy Legal system Based on statute and common law; there is no written constitution; Scotland has a separate legal system National legislature Bicameral; the House of Commons has 659 members directly elected on a first-past-the- post basis; the upper chamber, the House of Lords, was reformed in late 1999, as a result of which most hereditary peers have now lost their seats, but 92 have retained them pending a second stage of reform Electoral system Universal direct suffrage from age 18 National elections June 7th 2001; next general election due on May 5th, 2005 Head of state Queen Elizabeth II, who acceded to the throne in 1952 National government Cabinet headed by the prime minister; the prime minister is appointed by the monarch on the basis of ability to form a government with the support of the House of Commons; the present Labour government was re-elected to a second term in June 2001 Main political parties Labour Party; Conservative Party; Liberal Democrats; Scottish