Economy

Global Economic Outlook

The past year has seen the world continue to cope with the aftermath of a financial crisis unprecedented in recent years. For governments around the world, stabilising the financial system has been a priority, often at the cost of rising government deficits. This has resulted in a sharp loss of output and rising unemployment.

Of the major economies, Germany and Japan have suffered the sharpest falls in output, while the emerging markets of China and India continue to expand rapidly. Most forecasters project contraction in 2009 in Europe and North America, followed by a weak return to growth in 2010.

The Outlook for the UK

In the UK, average forecasts project a slightly smaller contraction than for our main competitors this year, with growth of 0.7% in 2010.

Falling global demand has led to falling inflation. The consumer price index peaked at 5.2% in September 2008, but is forecast to fall to just 1% in 2009.

The Government and the Bank of England have responded to the downturn with a range of measures to stimulate demand.

The Bank cut the base interest rate to 0.5% in March 2009, and also announced that it would start to inject money directly into the economy. In addition, the Government has used taxation and public expenditure to raise demand, including a reduction in the VAT rate to 15%.

Sterling fell against both the Euro and the US dollar in 2008 and early 2009, although it has since strengthened. This devaluation, along with stimulus and stabilisation measures and a gradually improving external environment, have led to some improvement in the outlook for the UK. However, credit constraints persist, impacting on house buyers and developers. Given the current state of public finances following recent counter-recessionary measures, most commentators also anticipate significant reductions in public spending.