UK Economics
Highlights
The Economic Outlook for London
Incorporating new and revised data, our estimate of London’s output growth in 2011 has been adjusted upwards to 1.9% - a creditable performance given the slow growth of the UK economy and London’s exposure to financial services. This performance was driven by the construction, information & communications and accommodation & food services sectors. London’s overall performance is expected to worsen slightly in 2012, with financial services forecast to show hardly any growth. However, a pickup in global growth, plus stronger consumer spending and business investment, should underpin an acceleration in London GDP growth in 2013, with output set to accelerate further over 2014-15. Employment growth for 2011 has also been revised upwards and is now estimated to have been 2.3%. The short-term outlook is weaker, with job losses expected in all public service sectors and the private sector struggling to create jobs in the face of weak demand. But over the longer term, as the recovery gains momentum, employment is forecast to return to its pre-recession growth rates of around 2% a year.
20 April 2012
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The aggregate mortgage repossessions outlook
The main drivers of mortgage possessions rates are three economic variables - the debt service ratio, the proportion of mortgages in negative equity and the unemployment rate - as well as forbearance policy and credit factors, including previous credit quality, access to refinancing opportunities and income support policy. As in the 1990s mortgage crisis, the 2008-9 upturn in the possessions rate was preceded by lower lending quality and rising debt and house price levels, accompanied by growing negative equity and unemployment. However, there is a stark difference. The 1990s crisis was triggered by a large rise in interest rates, and policy constraints prevented the reduction of rates. The recent rise in the possessions rate preceded the most dramatic interest rate reductions in British economic history. The lower interest rates and other policy interventions caused the UK possessions rate to peak at the beginning of 2009 at around half the peak experienced in the 1990s crisis. Our estimates suggest that possessions would have been at least 23 percent higher in the absence of policy interventions such as greater forbearance and more generous income support for those with payment difficulties.
20 April 2012
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The importance of the size of the output gap to fiscal policy
The question of the size of the output gap and forecasts for growth in potential output have become highly relevant for UK fiscal policy since the Chancellor adopted a cyclically-adjusted target for public finances. Targeting of cyclically-adjusted variables has a range of advantages. It allows for countercyclical fiscal policy while ensuring long-term fiscal sustainability and hence brings with it fiscal discipline and some degree of predictability. Discipline and predictability should rewarded by sovereign debt markets by lower interest rates on government debt. However, targeting of cyclically adjusted variables is certainly not a panacea, not least because it relies on accurate estimates and forecasts of potential output and the output gap, which are inherently difficult to obtain due to the unobservable nature of potential output, and consequently introduce a high degree of uncertainty.
20 April 2012
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