United Kingdom Business Forecast Report Q1 2014

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Jan 28, 2014, 11:30 ET

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United Kingdom Business Forecast Report Q1 2014

Core Views

The economy is recovering, but with fiscal cuts looming and unemployment
stubbornly high, the rate of growth will be fairly tepid by
historical standards.
In light of positive structural economic reforms undertaken by the
government, coupled with flexible monetary and exchange rate
policies, we remain bullish on the long-term economic prospects
for the UK relative to the eurozone over the longer term.
Despite numerous ructions between the ruling Conservatives and
Liberal Democrats, we expect the coalition government to hold firm
through to the next parliamentary election in 2015.

Major Forecast Changes

We have revised up our 2013 real GDP estimate to 1.5% from 1.1%
and have upped our 2014 forecast to 1.8% from 1.4% previously.

Key Risks To Outlook

Downside Risks To Medium-Term Growth: There are significant
downside risks to our economic growth forecasts, particularly
stemming from the impact of fiscal consolidation and the eurozone
sovereign debt crisis.

Upside Risks To Inflation: Should the pound remain broadly weak
and global commodity prices edge higher, we would warn of upside
risks to our inflation forecasts. Although there is little scope for a
substantial and sustained surge in inflation, we believe that there
are risks of inflation remaining stubbornly above target.
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
Party Conference Season Kick-Starts Race For 2015 8
The UK party conference season is a chance for the main parties to start spelling out the policies that will determine campaign
strategies ahead of the 2015 general election The ruling Conservatives have stuck with a pragmatic approach by focusing attention on
the recovery and stability of the public finances The opposition Labour party appears to be going down a more populist route by tackling
the so-called 'cost of living crisis' Although the latter will go down well with cash strapped voters, we still hold our out-of-consensus call
for the Tories to pick up the most seats in 2015
Long-Term Political Outlook 10
The Road To 2015 10
Despite just two years elapsing since the last parliamentary election, the UK's main political parties are already gearing up for the
next ballot in 2015 For the ruling Conservatives the election will hinge on the state of the economy and success of its proposed fiscal
reforms Meanwhile, for the beleaguered opposition Labour party, a credible alternative to the government's core economic strategy is
needed, in addition to reviving its image, which has been tainted by the fractious Brown-Blair era
Table: Political Overview 11
Chapter 2:Economic Outlook 15
SWOT Analysis 15
BMI Economic Risk Ratings 15
Economic Activity 16
Spontaneous Growth Surge Forces Up GDP Forecasts 16
If the latest leading indicator data are anything to go by, the UK economy could be close to hitting escape velocity, following many
quarters to sluggish growth Such has been the rapidity of the turnaround that we have revised up our 2013 growth forecast and we are
confident that 2014 will similarly beat our previous expectations We stress, however, that there are several weak points in the economy
and red flags which could yet undermine the resurgence in economic momentum
TABLE: ECONOMIC ACTIVITY 16
Monetary Policy 18
Getting To Grips With The Carney Conundrum 18
Having arrived at the Bank of England to much media fanfare, Governor Mark Carney's first major policy move - forward guidance - has
been widely criticised Although the idea of pledging to keep interest rates low has been well received, the execution has been let down
by knock-out clauses which have undermined the credibility of the bank's commitment to easy policy For the time being we stick to our
current core forecast for policy rates, with the first 25 basis point hike pencilled in for end-2016, and await third quarter GDP data to get
a better sense of whether the recent rebound in economic activity can be sustained heading into 2014
Table: MONETARY POLICY 18
Economic Activity II 20
Mind The Gap: The Struggle To Assess Spare Capacity 20
Assessing the amount of spare capacity in the UK economy since the financial crisis has been a thorn in the side of policymakers
and analysts alike We have long argued that the gap is probably not as large as many believe, which would go some way to explain
consistently above target inflation and may mean a sooner than expected normalisation in mone tary policy
Exchange Rate Policy 22
Sterling Strength Could Ultimately Prove A Red Herring 22
The British pound has rallied sharply in recent months as a slew of positive macro data have bolstered market sentiment If momentum
in the economy picks up, there would be limited prospect of the Bank of England making good on its forward guidance promise to keep
policy rates low However, for the time being we remain somewhat cautious given that it is not readily clear what has been driving the
surprise rebound in economic activity since mid-year
TABLE: EXCHANGE RATE 22
TABLE: Currency Forecast 23 September 2013 23
Banking Sector 24
Banking Sector: Still A Weak Point In The Recovery 24
The UK banking sector continues to shed assets and has failed to ramp up credit supply to the private sector Even as the economy
recovers, the banks will be under pressure to rein in bloated balance sheets On the back of data for the first eight months of the year,
we have revised down our growth forecast for 2013 and 2014
The UK Economy To 2022 25
UK Will Outperform Eurozone Over The Long Term 25
Despite the current economic stagnation in the UK, we hold to a more upbeat assessment over the longer term and expect growth to
outperform the eurozone Supportive of this view is the relatively competitive nature of the UK economy, independent monetary and
exchange rate policies as well as a major fiscal reforms However, we warn that a number of challenges remain, such as an ageing
workforce as well as low educational and training attainment in the poorest areas
Chapter 3: 10-Year Forecast 25
TABLE: Long-Term Macroeconomic Forecasts 25
Chapter 4:Business Environment 27
SWOT Analysis 27
BMI Business Environment Risk Ratings 27
Business Environment Outlook 28
Institutions 28
TABLE: BMI BUSINES AND OPERATION RISK RATINGS 28
Infrastructure 29
TABLE: BMI LEGAL FRAMEWORK RATING 29
TABLE: LABOUR FORCE QUALITY 30
TABLE: TRADE AND INVESTMENT RATINGS 31
Market Orientation 32
TABLE: ANUAL FDI INFLOWS 32
Operational Risk 33
Table: Top Export destinations (US$mn) 33
Infrastructure 35
Chapter 5: Key Sectors 35
TABLE: Construction And Infrastructure Industry Data, 2011-2016 36
TABLE: Construction And Infrastructure Industry Data, 2011-2016 37
Oil & Gas 39
TABLE: Oil Production, Consumption And Net Exports, 2011-2016 41
TABLE: Oil Production, Consumption And Net Exports, 2017-2022 42
Other Key Sectors 43
TABLE: Pharma Sector Key Indicators 43
TABLE: Telecoms Sector Key Indicators 43
TABLE: Defence and Security Sector Key Indicators 43
TABLE: Autos Sector Key Indicators 44
TABLE: Food and Drink Sector Key Indicators 44
Table: Freight Sector Key Indicators 44
Chapter 6: BMI Global Assumptions 45
Increasing Confidence In Growth 45
Table: Global Assumptions 45
Table: Developed States, Real GDP GrowtH, % 46
Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 46
Table: Emerging Markets, Real GDP Growth, % 46