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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©OECD Observer No 274, July 2009