The Macroeconomic Outlook for the United Kingdom

The recently elected Labour government came to power with the UK economy growing faster than it had done in a while: 0.7 per cent in the first quarter and 0.5 per cent in the second quarter. Since then, a sense of gloom has returned with the GFK consumer confidence index falling from –13 in July and August to –21 in October and the Chancellor pointing to a 'black hole' in the Public Finances of £22 billion. The Budget saw increases in spending, on public consumption and public investment, taxes – including Employer National Insurance Contributions, Capital Gains Tax and Stamp Duty, together with the continued freezing of income tax thresholds – and borrowing. We think the net effect was expansionary and so expect an improvement in growth in the United Kingdom over the next couple of years. Inflation now seems to be under control, although we know that there will be a rise in inflation in October on account of the increase in gas and electricity prices. Unemployment remains low at 4 per cent, although continued issues around the labour market data mean we cannot have complete certainty in this figure. Interest rates are now falling, and we expect further cuts over the coming year. Finally, real incomes continue to rise as wage inflation remains higher than price inflation.