United Kingdom: Weaker growth ahead
GDP grew at an above-trend pace of close to 3% through the first three quarters of 2007. However, growth is expected to be weaker in coming quarters, as both investment and consumer demand are likely to be damped by much weaker activity in the housing market, together with tighter credit conditions. Consumer price inflation has dropped sharply and is expected to remain close to the 2% target over the next two years.
After narrowing slightly in 2006, the government deficit now seems likely to move back above 3% of GDP. With fallout from the recent financial turmoil expected to limit tax revenues, additional measures will be needed to reduce the fiscal deficit more rapidly and ensure that the fiscal rules can be met in the medium term. Given the outlook for weaker output growth, the Bank of England can probably afford to ease monetary policy without risking additional inflationary pressures. Improved planning regulations, a reconsideration of the green-belt boundaries in fast-growing areas, as recommended by the Barker review, and better incentives for land development would raise potential growth and reduce the chance of house prices rebounding again.
©OECD Observer No. 264/265, December/January 2008
• OECD Economic Outlook No. 82, December 2007 - Preliminary version
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