For Britain – low interest rates and the weakening pound

With the advent of a more precise plan of the Conservative Party of Great Britain and slightly more predictable state of the economy of this country, it becomes possible to make assumptions about the future situation. Our latest economic forecast, which will be published later, reflects our average estimate compiled on the basis of stronger data and political development. In these circumstances, we expect the Conservative Party victory in the May elections with a substantial margin for the majority of seats in the cabinet. As a result, we see that monetary policy will receive a “powerful acceleration, while the fiscal experience a strong reversal.

We expect to reduce state spending by 80 billion pounds, increasing revenues from indirect taxes by 20 billion pounds and “return to the development of” package valued at 3 billion pounds. The good news for the Tories (Conservatives), it seems that their policy should work, the budget deficit fell to 2,5% of GDP before the end of the term Parliament, the economy has not fallen into recession, while unemployment will remain high and will grow gradually – but will start to decline in 2013.

The success of policies depends largely on maintaining a soft monetary policy – a combination of quantitative easing, and the base interest rate at 0.5%, at least until mid-2011 and will reduce the yield on 10-year state bonds to 2,5% in the next two years. This will lead to the continued weakening of the exchange rate of British currency – the pound will fall to 1.40 to the dollar and may temporarily reach parity with the euro, despite concern about the markets first signs of structural weakness of the euro.

Low interest rates and competitive pound in the end regains net exports, partly to restrain imports of industrial goods and investment, particularly in kommecheskuyu property. GDP growth from 2010 to 2014 the average will be slightly below 1.5% – not high, not much lower than in any other strategy. Following the recovery from recession in the second half of 2009, growth will return in 2010, but slowed again in 2011-2012 i.i, to the extent that the tax concessions to be abolished. In 2013-2014 GG growth will exceed 2,0% for the first time since 2007.

Naturally, there are risks. The biggest risk is that external factors and a weak pound could presage that inflation is too high in order to keep low interest rates. That is why the Tory strategy of the labor market is so important – “return to work” on the plan may be worth the money (we assume more than voiced in the press 600 million), but they are required to curb the growth of unemployment and maintaining downward pressure on inflation in the costs of business expenditures and as a consequence of the consumer price index.

But conservatives can legitimately argue that the risks of alternative scenarios is much higher – the risk that financial markets would refuse to finance the growth of debt burden and a wider economic crisis.

We believe that the plans of George Osborne (George Osborne, head of the Shadow, the opposition, the Cabinet of Ministry of Finance) is correct, but they largely depend on the situation in the world economy, on growth outside the United Kingdom and the maintenance of confidence in the markets.

The economics of George Osborne –
assume very low interest rates a weakish pound and falling bond yields,
center of economics and business research ltd (cebr)
October 6