Thoughts On UK- Policy, Deficits & More

• Gordon Brown eagerly awaits June 27th, when Tony Blair will step down as Prime Minister. The initial policy impact of a change in leadership will likely be minimal, as the Chancellor has been the architect of the administration’s economic and fiscal measures.
  
  
• On the international side, Gordon Brown appears to support a strong relationship with the US. So far sentiment is moving in opposite direction, as public support for British presence in Iraq continues to drop, though it is equally evident that there is not strong support for a major strengthening of ties with the EU.
  
  
• Fiscal consolidation remains a pending issue. UK's deficits, second largest after the US, will likely hover close to 3% of GDP through 08 thanks to the recent strengthening of the British pound.
  
  
• Despite the BoE’s concerns regarding possible strains on economic capacity, government spending still shows no signs of being effectively reined in, as Chancellor of the Exchequer Gordon Brown’s prime ministerial ambitions may be limiting the extent of fiscal retrenchment.
  
  
• The ratio of government debt to GDP has been rising steadily since 01 and is approaching 45%, still substantially lower than that of other major European Union members.
  
  
• While such a debt burden is manageable, the administration’s reluctance to achieve significant deficit reductions during periods of economic growth limits the leeway to react swiftly to any economic downturn without damaging the government’s balance sheet.
  
  
• The household sector poses the largest risk to the economy. Its record-high debt burden, closely linked to an earlier rapid rise in housing prices (equivalent to about 150% of disposable income). The adverse impact on debt-servicing capacity of sluggish growth in household incomes has been intensified as a result of rising domestic interest rates.
  
  
• Personal bankruptcies are soaring. The jobless rate on a claims basis has been holding steady at 3%, not much above earlier cyclical lows.
  
  
• Although consumer confidence remains subdued, net household borrowing continues to grow at a monthly rate of close to 1% despite the gradual rise in borrowing costs.
  
  
• Employment conditions are still favorable (unemployment rate remains at 5.5%), but some weakening may become evident as the labor-intensive services sector slows.