United Kingdom: Severe recession

The economy is in a severe recession, with output projected to decline by 4.3% in 2009 and recover only mildly in 2010. The financial crisis has severely impaired the supply of credit and house prices have fallen sharply, thus restraining business and household spending.

The depreciation of sterling is mitigating the downturn, but cannot overcome falling foreign demand. The unemployment rate is projected to rise towards 10% in 2010, with inflation well below the 2% target for an extended period.

Measures to support the financial sector, dramatic monetary easing and fiscal stimulus, have cushioned the downturn. Given a policy rate close to zero and quantitative easing well under way, monetary policy is highly expansionary. At the same time, public finances have deteriorated sharply-with the fiscal deficit expected to rise to 14% of GDP in 2010-curtailing the possibilities for additional fiscal stimulus. To improve stability, the government should continue to develop a concrete and comprehensive plan to ensure that debt is on a declining path once recovery takes hold. A continued strong focus on labour force activation policies is also warranted to buttress medium term labour supply.

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See also www.oecd.org/uk

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©OECD Observer No 274, July 2009




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