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United Kingdom Business Forecast Report Q3 2014

  • April 2014
  • -
  • Business Monitor International
  • -
  • 52 pages

Core Views

The economy is recovering, but with fiscal cuts looming and unemployment stubbornly high, the rate of growth will be fairly tepid by historical standards.
In light of positive structural economic reforms undertaken by the government, coupled with flexible monetary and exchange rate policies, we remain bullish on the long-term economic prospects for the UK relative to the eurozone over the longer term. Despite numerous ructions between the ruling Conservatives and Liberal Democrats, we expect the coalition government to hold firm through to the next parliamentary election in 2015.

Major Forecast Changes

We have revised up our 2014 real GDP forecast to 2.6% from 2.1% previously

Table Of Contents

United Kingdom Business Forecast Report Q3 2014
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
The 2014 Budget: Presenting The Pre-Election Narrative 8
The UK 2014 budget was never going to be a game changer in economic terms given the strict fiscal course set out by the ruling
coalition upon forming government in 2010. However, make no mistake, this is a big budget in political terms. The ruling Conservative
party has clearly set out its campaign strategy ahead of the 2015 general election, which we believe will start to feed through to opinion
polls over the course of the next year. Given the minimal difference in support between the main ruling and opposition parties, the race
in 2015 will be extremely close.
Table: Political Overview 8
Long-Term Political Outlook 10
The Road To 2015 10
Despite just two years elapsing since the last parliamentary election, the UK's main political parties are already gearing up for the
next ballot in 2015. For the ruling Conservatives the election will hinge on the state of the economy and success of its proposed fiscal
reforms. Meanwhile, for the beleaguered opposition Labour party, a credible alternative to the government's core economic strategy is
needed, in addition to reviving its image, which has been tainted by the fractious Brown-Blair era.
Chapter 2: Economic Outlook 15
SWOT Analysis 15
BMI Economic Risk Ratings 15
Economic Activity 16
The Strong But Fragile Recovery 16
The UK economy will be one of the fastest growing among developed states in 2014. Although headline growth numbers will be robust,
the foundations of the recovery are still weak. Indeed, the sudden burst in activity over the last 12 months is largely the result of a surge
in consumer spending and a turnaround in the property market.
Monetary Policy 17
Making Sense Of BoE 'Guidance' 17
The signalling power of the Bank of England has been undermined by the ill-fated adoption of forward guidance and a misjudged
unemployment target, which has now been effectively abandoned after barely six months of service. This slip-up has further
compounded the ability of the BoE to transmit monetary policy through the broader economy, and risks triggering greater volatility in the
money market.
TABLE: SONIA-Implied Bank Rate Probabilities 18
Economic Activity II 21
Economic Capacity: Limited Slack Being Quickly Absorbed 21
Assessing the amount of slack in the UK economy remains a contentious issue and one which has created an air of uncertainty over the
shape and speed of the recovery. Far from being just an abstract concern, excess capacity has a direct bearing on growth, inflation and
the design of fiscal and monetary policies.
Exchange Rate Policy 27
GBP Standing Strong Against The Dollar 27
The British pound has got off to a strong start in 2014, with the first quarter average set to come in around USD1.65/GBP. Spurred on
by the continued slew of positive macro data and speculation that the Bank of England is getting closer to tightening monetary policy,
the pound's strength against the US dollar and on a trade-weighted basis shows few signs of abating.
TABLE: United Kingdom Curency Forecast 27
Banking Sector 29
Banking Sector: Deposit Withdrawals Intensifying Asset Shedding 29
In light of the still rapid pace of deleveraging, we have revised down our forecasts for UK banking sector growth over the medium term.
This will reflect the move towards tighter regulation and the need to reduce exposure to riskier assets, as well as continued deposit
outflows which are shrinking the liability side of the balance sheet.
Chapter 3: 10-Year Forecast 31
The UK Economy To 2023 31
UK Will Outperform The Eurozone Over The Long Term 31
Despite the current economic stagnation in the UK, we hold to a more upbeat assessment over the longer term and expect growth to
outperform the eurozone. Supportive of this view is the relatively competitive nature of the UK economy, independent monetary and
exchange rate policies as well as a major fiscal reforms. However, we warn that a number of challenges remain, such as an ageing
workforce as well as low educational and training attainment in the poorest areas.
table : Long -Term Macroeconomic Forecasts 31
Chapter 4: Business Environment 33
SWOT Analysis 33
BMI Business Environment Risk Ratings 33
Business Environment Outlook 34
Institutions 34
Infrastructure 35
Market Orientation 38
Operational Risk 39
Table : Top Export destinations (USDmn ) 39
Chapter 5: Key Sectors 41
Defence 41
TABLE: Defence Expenditure 42
Renewables 45
TABLE: Total Electricity Generation Data And Forecasts, 2012-2017 47
TABLE: Total Electricity Generation Long -Term Forecasts , 2018-2023 48
Other Key Sectors 49
table: Oil and Gas Sector Key Indicators 49
table : Telecoms Sector Key Indicators 49
table: Infrastructure Sector Key Indicators 49
table: Autos Sector Key Indicators 50
table: Food and Drink Sector Key Indicators 50
table : Freight Key Indicators 50
Chapter 6: BMI Global Assumptions 51
Global Outlook 51
Chinese Economy Under Pressure 51
Table : Global Assumptions 51
Table : Developed States , Real GDP Growt H, % 52
Table : Emerging Markets , Real GDP Growth , % 53

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