Overview Growth in the United Kingdom looks set to resume in 2013 (+0.8%) and 2014 (+1.3%) after a fall in 2012 (-0.1%). The drivers of the recovery should be balanced, powered by positive contributions from domestic and external demand. Investment is expected to begin to gradually recover, aided by fiscal stimulus measures, continued monetary easing and an increasingly favorable business climate. Private sector consumption will rebound, albeit limited by continuing household deleveraging and austerity measures. Foreign trade will contribute positively to growth, driven by faster growth in exports relative to imports thanks to a reorientation of production towards more high-performance sectors and trading partners.
Economic Outlook no. 1189-1190 |Macroeconomic, Risk and Insolvency Outlook
The policy mix is becoming increas- ingly favorable to growth. The budget- ary adjustment timetable has been extended by one year: the budget bal- ance will break below the -3% threshold in 2017 (as opposed to 2016 in the pre- vious budget) and the debt will start to decrease from 2016 (versus 2015). The range of stimulus measures has been broadened, notably with further cuts in the corporate tax out to 2014 (to 21% after 23% in 2013 and 24% in 2012) and tax exemptions for the poorest house- holds. The BoE has continued with its expansionary monetary policy, main- taining its official bank rate extremely low, increasing its asset purchase pro- gram to GBP 375 billion and encourag- ing an increase in lending to non- financial companies (through measures such as the Funding for Lending Scheme). While these meas- ures are slow to bear fruit as of late 2012, we expect positive effects from H2 2013 with a recovery in domestic components excluding public spend- ing. This scenario nevertheless remains vulnerable to the risk of being punished by the financial markets for not meeting the budgetary targets set out by the government.
Investment is likely to drive growth. Companies are increasingly better- armed to face the future. The business climate is more favorable for them, notably as the government is pushing
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ahead with its supply-side policy (tax cuts, infrastructure development and research and development incentives) while the central bank is adopting a res- olutely pro-growth stance (having entered into its third wave of quantita- tive easing and introduced measures to boost lending to companies). The situa- tion of companies has improved. Corporate profitability indicators have shown satisfactory results in 2012, while insolvencies have fallen by -6% and are forecast to decline a further -4%. Investment is expected to increase mod- erately, initiating a virtuous circle by speeding up the recovery in employment and, thereby, in household demand.
Household consumption remains extremely fragile, but is expected to gradually recover in 2014. The rebound in private sector consumption in 2012 can be explained primarily by the Olympic Games. Fundamentals point to a stabilization in the pace of growth in 2013. Household spending is likely to pick-up on the back of a more buoyant job market. Any acceleration, however, will be limited. First, house- holds are continuing to deleverage. Second, purchasing power remains on a downtrend, eroded by inflationary pressures linked to persistently high energy prices in late 2012 and increased prices in education in 2013 (following the hikes in university fees scheduled in the budget).
Foreign trade will post a positive per- formance. One of the priorities of the government’s supply-side policy has been to make every effort to boost British exports. To this end, emphasis has been placed, on the one hand, on (1) measures to boost non-price com- petitiveness through a policy encour- aging innovation and investment, and price competitiveness through tax cuts; and on the other hand (2) a policy of diversifying export partners through partnerships in order to limit the reliance on eurozone demand. The expected effect of this policy is an acceleration in exports relative to imports from H2 2013._MI
To watch…
>The trend in demand from the eurozone and the United States but also the share these two regions represent in British exports. >The trend in the budget balance and any reaction by the financial markets to a possible downgrade of the United Kingdom’s rating by the main agencies. >Business confidence surveys._