Forecast Of UK Economic Outlook In 2009

If the current economic woes continue,

(1) Inflation will further fall (9/10). At the meantime there will be no threat of high oil price. On the other hand, consumption will likely fall given the unsettled housing market woes. Firms will deter or even cancel their investment spending as they are worry that they can’t recoup their capital or operate profitably. There is limited space for fiscal expenditure, as UK’s national debt is getting higher. Export will likely fall given that main UK trading partners such as France, Germany, Italy, Spain, US etc are facing various economic uncertainties. There will be no demand pull or cost push inflation

(2) Interest rate cut (7/10). UK’s interest rate is still high at 4.5% & this gives Monetary Policy Committee (MPC) much flexibility to further reduce it. There could be another round of 25-50 basis points (0.25%-0.5%) slashed to stimulate household spending & investment into the economy

(3) Pound is set to fall (7/10). Lower interest rates will mean those rich foreigners or large institutional investors will withdraw their savings from UK & look for another country which offer attractive yields. Furthermore the current guarantee by UK government for the first £50, 000 of savings will not help to restore savers confidence. News of banks being rundown from time to time will cause these savers to withdraw their money causing pound to further fall when they convert it back to home currency. Also investors are now eyeing on the safe haven, investing in gold & silver

(4) Unemployment increasing (8/10). The manufacturing sector which is already in such a mess will run into a deeper recession as demand for exports will likely weaken. More job cuts will be reported. Figures of unemployment will be much higher when we sum this up with those retrenched workers from the financial institutions

(5) Lower property prices (7/10). People do not dare to take financial commitment e.g. financing new assets due to fear over job losses. Banks on the other hand are now more stringent in lending due to credit shortage, high interbank lending rate (LIBOR) & fear over the same problem will repeat itself. This automatically means lower prices for property as demand for housing is likely to be weak throughout 2009

(6) Increase government borrowing (7/10). UK government will continue to pump in more money to increase the liquidity in the banking system. Also it’s part of an effort to restore confidence in the financial institutions so that they can start lending once again