Introduction
After a tumultuous year in 2011 full of ups and downs and mixed sentiments, the U.K. economy may witness another year of uncertainty and turbulences as all signs indicate the British economy is not out of the woods yet. The U.K. economy witnessed a slowdown in growth pace along with high unemployment and inflation rates due to many factors led by the strong austerity measures adopted to lower the huge budget deficit. Other factors that yielded in the drop in consumer spending and contraction in the economy's major sectors were the crystal clear slowdown in major economies, most notably in the U.S., on the back of the sharp spending cuts and monetary tightening, the escalating European debt crisis, some natural crisis in some Asian economies and political changes in some countries. With further expected austerity measures by the British government to meet its budget shortfall targets, some time for major economies to recover from the imbalances of the 2008 financial crisis and unease in the European debt dilemma due to the political frictions, indecision and spread of debt contagion from one county to another, including large economies, seen clearly in the significant rise in borrowing cost at bond auctions, the U.K. is likely to face a shaky and uncertain macroeconomic prospects in 2012. A) Growth The British growth eased to 0.0% in the second quarter of 2011 form 0.4% in the first quarter while rebounded to 0.6% in the third quarter yet may drop again in the fourth quarter as seen by the latest data released by the U.K. economy. The major factors that affected growth were the strong austerity measures adopted by the government, global slowdown and the elevating European debt woes. In 2012, the outlook, as announced by many U.K. officials, refers to a downside revision in growth prospects. The BoE in its latest growth projections referred to an average 1% growth in 2012 from the previous estimates of 2%, clarifying that the U.K. economy will be under pressure from the euro zone debt crisis. BoE Deputy Charles Bean said the U.K. will face a difficult year in 2012, yet he still believes "some return to growth" in the second half as inflation slowdown will boost consumer spending. The Office of Budget Responsibility (OBR), the independent body that announces forecasts for the economy, also slashed its growth estimates to 0.7% in 2012 from the previously forecasted 2.5%. It said there is a 1-in-3 chance the British economy could experience a recession. Moreover, the OECD said the British economy will record an annual growth of 0.5% in 2012 from preceding estimates of 1.8%, where exports and household consumption are expected to recover, yet it mentioned the U.K. is heading toward a double dip recession in six-month time, while the IMF expects 1.6% expansion. B) Unemployment Due to the deep austerity measures and sluggish growth, the jobless rate remained high throughout the year, ranging between 7.9% and 8.0%, yet it rose further by the end of 2011 reaching 17-year high at 8.3% in the three months ended October, according to the ILO unemployment gauge. With the sluggish growth rate and decline in consumer spending, many companies cut jobs to lower their costs. The OBR predicts the rate to rise to 8.7% from the previously expected drop to 7.4%. The OECD also expect further rise in jobless rate to 8.8% in 2012. C) Public Debt Following the large spending by the British government in 2010 to boost the economy, the government found itself highly indebted which prompted it to launch strong austerity measures in 2011, including large spending cuts and rise in taxes. The latest budget deficit data showed that the shortfall narrowed in November. Net borrowing excluding support for banks retreated to 18.1 billion pounds compared with 20.4 billion pounds deficit a year earlier as the tax revenue advanced 7.1% while spending increased 0.8% from 0.5%, yet net debt jumped to 977 billion pounds, or 62.8% of gross domestic product. The drop in deficit remained slow in 2011 due to sluggish growth that resulted in lower tax receipts. The OBR expects the deficit to gradually decline to 53 billion pounds by 2015-2016 from 120 billion pounds in 2012-2013, where the structural budget deficit will reach 4.6% of GDP in 2011 while will record a surplus within five-year term, yet next year it seems that the government will miss its targets for deficit reduction as it will spend more than 48 billion pounds on debt interest payments in 2012, while has to borrow an extra 158 billion pounds over the next five years. The OECD expects the government debt to rise in 2012, where the IMF said the deficit will reach 7% of GDP. D) Inflation Throughout 2011, inflation has remained above the BoE's upper limit of 3% where the rate ranged from 4% to 4.5% till August, reaching its peak of 5.2% in September. In October and November, the rate decelerated to 5.0% and 4.8% respectively. With the expected spending cuts, weak growth and high unemployment in 2012, inflation is likely to recede. The BoE's latest inflation outlook refers to a sharp fall in the rate over 2012 as factors keeping inflation above the target which are the increase in the VAT from 17.5% to 20% at the beginning of 2011, previous depreciation of the pound and the rise in import and energy prices will face downward pressure from the slack in labor market and the spare economic capacity. Policy makers expect the rate to slow to below the 2% by late 2012. Also, the IMF said Britain's inflation will stand at 2.4% in 2012. II- Market Response A) The Sterling The cable took a downside trend versus the euro in the first six months of 2011, yet it managed to rebound in the second half as the escalating European debt crisis weighed on the euro. In 2012, the pound is predicted to show some advance against the 17-nation currency as the debt crisis is expected to take more effect. Against the U.S. dollar, the sterling advanced in the first half where it started to fall in the second half as the safe haven characteristic of the dollar gave it a privilege amid the turbulence in markets on the back of the debt woes and sluggish global growth. In 2012, the situation in the U.S. seems to be much better than the U.K. along with the refuge merit of the dollar which suggest further decline for the pound versus the green currency at least in the first half of the year. B) FTSE The FTSE showed bearishness with some rebound attempts in 2011 as it was affected by the uncertain outlook for the British economy, swelling European debt woes, slowdown in global demand and downbeat earnings by large European companies. For 2012, further uncertainty is predicted to prevail with the inability of European leaders to ease the debt crisis. Thus, the FTSE is predicted to undertake a track similar to the 2011, characterized by more bearishness and rebound attempts. III- BoE Action According to the aforesaid developments seen throughout 2011, the BoE kept interest rate low at 0.50% for the whole year to spur growth while decided to add 75 billion pounds to the Asset Purchase Facility (APF), to reach a total of 275 billon pounds in October 2011, for the first time since 2009. The action was taken after the latest data showed a significant slowdown signs which sparked concerns the U.K. is heading towards another recession. However, policy makers split as the high inflation rate -which remained above the target for the whole year- coincided with slow growth and accordingly caused some to call for raising interest rate to contain inflation while others asked for expanding the APF more to boost the economy. A) Interest rate In accordance with the expected severe spending reductions, slow growth and high unemployment, the BoE is likely to keep the borrowing cost unchanged at its low level of 0.50% to boost the economy, where if policy makers decided to raise interest rate this will probably be in the end 2012. Another reason that makes leaving interest rate an inevitable action by the bank is that inflation rate which is predicted to retreat gradually, yet will remain above the 2% target all over the year. Thus, there will be no pressure on the bank to raise interest rate as shoring up growth will be a higher priority. B) APF Further expansion in stimulus is expected at the beginning of the year, probably in February or shortly after, where another 50 billion pounds could be added, to see the impact of the program, launched in October, which will end in February, and with the release of the February's inflation report that will include the latest growth and inflation forecasts. Some BoE policy makers said there may be a need for more stimuli due to the high threats posed from euro area neighbors. Bean said the BoE will add to stimulus in February with the end of the program, if necessary. Policy maker Spencer Dale said with the likelihood that inflation would come below the 2% by late 2012; there are higher chances of expanding the bond purchases. The OECD mentioned that the BoE has to add to non-standard measures by 125 billion pounds in 2012, where the money printing process may take part in early 2012, as the economy is predicted to record contraction in the first half of the year. All in all, the outlook for the British economy is predicted to be dominated by uncertainty and likely to be affected by the latest developments in the euro area debt crisis. There is higher probability to see a slowdown and may be contraction in the first half of the year due to the debt crisis and strong spending cuts while a rebound in the second half is inevitable as the decline in inflation will bolster consumer spending, where the public debt will remain high. Consequently, the BoE is estimated to keep interest rate steady at its low level to spur recovery while adding to stimulus early in the year to stimulate the economy, especially amid expectations of deceleration in prices.
A) Growth
After a tumultuous year in 2011 full of ups and downs and mixed sentiments, the U.K. economy may witness another year of uncertainty and turbulences as all signs indicate the British economy is not out of the woods yet. The U.K. economy witnessed a slowdown in growth pace along with high unemployment and inflation rates due to many factors led by the strong austerity measures adopted to lower the huge budget deficit. Other factors that yielded in the drop in consumer spending and contraction in the economy's major sectors were the crystal clear slowdown in major economies, most notably in the U.S., on the back of the sharp spending cuts and monetary tightening, the escalating European debt crisis, some natural crisis in some Asian economies and political changes in some countries. With further expected austerity measures by the British government to meet its budget shortfall targets, some time for major economies to recover from the imbalances of the 2008 financial crisis and unease in the European debt dilemma due to the political frictions, indecision and spread of debt contagion from one county to another, including large economies, seen clearly in the significant rise in borrowing cost at bond auctions, the U.K. is likely to face a shaky and uncertain macroeconomic prospects in 2012. A) Growth The British growth eased to 0.0% in the second quarter of 2011 form 0.4% in the first quarter while rebounded to 0.6% in the third quarter yet may drop again in the fourth quarter as seen by the latest data released by the U.K. economy. The major factors that affected growth were the strong austerity measures adopted by the government, global slowdown and the elevating European debt woes. In 2012, the outlook, as announced by many U.K. officials, refers to a downside revision in growth prospects. The BoE in its latest growth projections referred to an average 1% growth in 2012 from the previous estimates of 2%, clarifying that the U.K. economy will be under pressure from the euro zone debt crisis. BoE Deputy Charles Bean said the U.K. will face a difficult year in 2012, yet he still believes "some return to growth" in the second half as inflation slowdown will boost consumer spending. The Office of Budget Responsibility (OBR), the independent body that announces forecasts for the economy, also slashed its growth estimates to 0.7% in 2012 from the previously forecasted 2.5%. It said there is a 1-in-3 chance the British economy could experience a recession. Moreover, the OECD said the British economy will record an annual growth of 0.5% in 2012 from preceding estimates of 1.8%, where exports and household consumption are expected to recover, yet it mentioned the U.K. is heading toward a double dip recession in six-month time, while the IMF expects 1.6% expansion. B) Unemployment Due to the deep austerity measures and sluggish growth, the jobless rate remained high throughout the year, ranging between 7.9% and 8.0%, yet it rose further by the end of 2011 reaching 17-year high at 8.3% in the three months ended October, according to the ILO unemployment gauge. With the sluggish growth rate and decline in consumer spending, many companies cut jobs to lower their costs. The OBR predicts the rate to rise to 8.7% from the previously expected drop to 7.4%. The OECD also expect further rise in jobless rate to 8.8% in 2012. C) Public Debt Following the large spending by the British government in 2010 to boost the economy, the government found itself highly indebted which prompted it to launch strong austerity measures in 2011, including large spending cuts and rise in taxes. The latest budget deficit data showed that the shortfall narrowed in November. Net borrowing excluding support for banks retreated to 18.1 billion pounds compared with 20.4 billion pounds deficit a year earlier as the tax revenue advanced 7.1% while spending increased 0.8% from 0.5%, yet net debt jumped to 977 billion pounds, or 62.8% of gross domestic product. The drop in deficit remained slow in 2011 due to sluggish growth that resulted in lower tax receipts. The OBR expects the deficit to gradually decline to 53 billion pounds by 2015-2016 from 120 billion pounds in 2012-2013, where the structural budget deficit will reach 4.6% of GDP in 2011 while will record a surplus within five-year term, yet next year it seems that the government will miss its targets for deficit reduction as it will spend more than 48 billion pounds on debt interest payments in 2012, while has to borrow an extra 158 billion pounds over the next five years. The OECD expects the government debt to rise in 2012, where the IMF said the deficit will reach 7% of GDP. D) Inflation Throughout 2011, inflation has remained above the BoE's upper limit of 3% where the rate ranged from 4% to 4.5% till August, reaching its peak of 5.2% in September. In October and November, the rate decelerated to 5.0% and 4.8% respectively. With the expected spending cuts, weak growth and high unemployment in 2012, inflation is likely to recede. The BoE's latest inflation outlook refers to a sharp fall in the rate over 2012 as factors keeping inflation above the target which are the increase in the VAT from 17.5% to 20% at the beginning of 2011, previous depreciation of the pound and the rise in import and energy prices will face downward pressure from the slack in labor market and the spare economic capacity. Policy makers expect the rate to slow to below the 2% by late 2012. Also, the IMF said Britain's inflation will stand at 2.4% in 2012. II- Market Response A) The Sterling The cable took a downside trend versus the euro in the first six months of 2011, yet it managed to rebound in the second half as the escalating European debt crisis weighed on the euro. In 2012, the pound is predicted to show some advance against the 17-nation currency as the debt crisis is expected to take more effect. Against the U.S. dollar, the sterling advanced in the first half where it started to fall in the second half as the safe haven characteristic of the dollar gave it a privilege amid the turbulence in markets on the back of the debt woes and sluggish global growth. In 2012, the situation in the U.S. seems to be much better than the U.K. along with the refuge merit of the dollar which suggest further decline for the pound versus the green currency at least in the first half of the year. B) FTSE The FTSE showed bearishness with some rebound attempts in 2011 as it was affected by the uncertain outlook for the British economy, swelling European debt woes, slowdown in global demand and downbeat earnings by large European companies. For 2012, further uncertainty is predicted to prevail with the inability of European leaders to ease the debt crisis. Thus, the FTSE is predicted to undertake a track similar to the 2011, characterized by more bearishness and rebound attempts. III- BoE Action According to the aforesaid developments seen throughout 2011, the BoE kept interest rate low at 0.50% for the whole year to spur growth while decided to add 75 billion pounds to the Asset Purchase Facility (APF), to reach a total of 275 billon pounds in October 2011, for the first time since 2009. The action was taken after the latest data showed a significant slowdown signs which sparked concerns the U.K. is heading towards another recession. However, policy makers split as the high inflation rate -which remained above the target for the whole year- coincided with slow growth and accordingly caused some to call for raising interest rate to contain inflation while others asked for expanding the APF more to boost the economy. A) Interest rate In accordance with the expected severe spending reductions, slow growth and high unemployment, the BoE is likely to keep the borrowing cost unchanged at its low level of 0.50% to boost the economy, where if policy makers decided to raise interest rate this will probably be in the end 2012. Another reason that makes leaving interest rate an inevitable action by the bank is that inflation rate which is predicted to retreat gradually, yet will remain above the 2% target all over the year. Thus, there will be no pressure on the bank to raise interest rate as shoring up growth will be a higher priority. B) APF Further expansion in stimulus is expected at the beginning of the year, probably in February or shortly after, where another 50 billion pounds could be added, to see the impact of the program, launched in October, which will end in February, and with the release of the February's inflation report that will include the latest growth and inflation forecasts. Some BoE policy makers said there may be a need for more stimuli due to the high threats posed from euro area neighbors. Bean said the BoE will add to stimulus in February with the end of the program, if necessary. Policy maker Spencer Dale said with the likelihood that inflation would come below the 2% by late 2012; there are higher chances of expanding the bond purchases. The OECD mentioned that the BoE has to add to non-standard measures by 125 billion pounds in 2012, where the money printing process may take part in early 2012, as the economy is predicted to record contraction in the first half of the year. All in all, the outlook for the British economy is predicted to be dominated by uncertainty and likely to be affected by the latest developments in the euro area debt crisis. There is higher probability to see a slowdown and may be contraction in the first half of the year due to the debt crisis and strong spending cuts while a rebound in the second half is inevitable as the decline in inflation will bolster consumer spending, where the public debt will remain high. Consequently, the BoE is estimated to keep interest rate steady at its low level to spur recovery while adding to stimulus early in the year to stimulate the economy, especially amid expectations of deceleration in prices.
A) Growth
The
British growth eased to 0.0% in the second quarter of 2011 form 0.4% in
the
first
quarter while rebounded to 0.6% in the third quarter yet may drop again
in
the
fourth quarter as seen by the latest data released by the U.K.
economy. The major factors that affected growth were the strong
austerity
measures
adopted by the government, global slowdown and the elevating European
debt
woes.
In 2012, the outlook, as announced by many U.K.
officials, refers to a downside revision in growth prospects. The BoE
in its latest growth
projections referred to an average 1% growth in 2012 from the previous
estimates
of 2%,
clarifying that the U.K. economy will be under pressure from the euro
zone
debt crisis. BoE Deputy Charles Bean said the U.K. will face a difficult year in 2012, yet he still believes "some return to growth" in the second
half as inflation slowdown will boost consumer spending.
The
Office of Budget Responsibility (OBR), the independent body that
announces
forecasts for the economy, also slashed its growth estimates to 0.7% in
2012
from the
previously forecasted 2.5%. It said there is a 1-in-3 chance the
British
economy could experience a recession.
Moreover, the OECD said the British economy will record an annual growth
of 0.5%
in 2012
from preceding estimates of 1.8%, where exports and household
consumption are expected to recover, yet it mentioned the U.K. is
heading toward
a double
dip recession in six-month time, while the IMF expects 1.6% expansion.
B)
Unemployment
Due to
the deep austerity measures and sluggish growth, the jobless rate
remained
high throughout the year, ranging between 7.9% and 8.0%, yet it rose
further
by the end of 2011 reaching 17-year high at 8.3% in the three months
ended
October, according to the ILO unemployment gauge. With the sluggish
growth
rate and
decline in consumer spending, many companies cut jobs to lower their
costs.
The
OBR predicts the rate to rise to 8.7% from the previously
expected
drop to 7.4%. The OECD also expect further rise in jobless rate to 8.8%
in 2012.
C)
Public Debt
Following the large spending by the British government in 2010 to boost
the
economy,
the government found itself highly indebted which prompted it to launch
strong
austerity measures in 2011, including large spending cuts and rise in
taxes.
The
latest budget deficit data showed that the shortfall narrowed in
November. Net borrowing excluding
support for
banks
retreated to 18.1 billion pounds compared with 20.4 billion pounds
deficit
a year
earlier as the tax revenue advanced 7.1% while spending increased 0.8%
from
0.5%, yet net debt jumped to 977 billion pounds, or 62.8% of gross
domestic
product.
The drop in deficit remained slow in 2011 due to sluggish growth that
resulted
in lower tax receipts.
The OBR
expects the deficit to gradually decline to 53 billion pounds by
2015-2016 from 120 billion pounds in 2012-2013, where the structural
budget
deficit
will reach 4.6% of GDP in 2011 while will record a surplus within
five-year term, yet next year it seems that the government will miss its
targets
for
deficit reduction as it will spend more than 48 billion pounds on debt
interest
payments in 2012, while has to borrow an extra 158 billion pounds over
the next
five years.
The OECD expects the government debt to rise in 2012, where the
IMF said the deficit will reach 7% of GDP.
D)
Inflation
Throughout 2011, inflation has remained above the BoE's upper limit of
3% where
the rate
ranged from 4% to 4.5% till August, reaching its peak of 5.2% in
September. In October and November, the rate decelerated to 5.0% and
4.8%
respectively.
With the
expected spending cuts, weak growth and high unemployment in 2012,
inflation is likely to recede.
The
BoE's latest inflation outlook refers to a sharp fall in the rate over
2012
as
factors keeping inflation above the target which are the increase in the
VAT
from
17.5% to 20% at the beginning of 2011, previous depreciation of the
pound
and the
rise in import and energy prices will face downward pressure from the
slack in
labor market and the spare economic capacity. Policy makers expect the
rate to
slow to below the 2% by late 2012.
Also,
the IMF said Britain's inflation will stand at 2.4% in 2012.
II-
Market Response
A)
The Sterling
The
cable
took a downside trend versus the euro in the first six months of 2011,
yet
it
managed to rebound in the second half as the escalating European debt
crisis
weighed
on the euro. In 2012, the pound is predicted to show some advance
against
the 17-nation currency as the debt crisis is expected to take more
effect.
Against
the U.S.
dollar, the sterling advanced in the first half where it started to
fall in
the second half as the safe haven characteristic of the dollar gave it a
privilege amid the turbulence in markets on the back of the debt woes
and
sluggish
global growth. In 2012, the situation in the U.S. seems to be much better than the U.K.
along with the refuge merit of the dollar which suggest further decline
for
the
pound versus the green currency at least in the first half of the year.
B)
FTSE
The
FTSE
showed
bearishness with some rebound attempts in 2011 as it was affected by the
uncertain outlook for the British economy, swelling European debt woes,
slowdown
in
global demand and downbeat earnings by large European companies. For
2012,
further
uncertainty is predicted to prevail with the inability of European
leaders
to ease the debt crisis. Thus, the FTSE is predicted to undertake a
track
similar to the 2011, characterized by more bearishness and rebound
attempts.
III-
BoE Action
According to the aforesaid developments seen throughout 2011, the BoE
kept
interest
rate low at 0.50% for the whole year to spur growth while decided to
add 75
billion pounds to the Asset Purchase Facility (APF), to reach a total of
275
billon pounds in October 2011, for the first time since 2009. The action
was
taken
after the latest data showed a significant slowdown signs which sparked
concerns
the U.K. is heading towards another recession. However, policy makers
split as
the high inflation rate -which remained above the target for the whole
year-
coincided with slow growth and accordingly caused some to call for
raising
interest
rate to contain inflation while others asked for expanding the APF more
to boost
the economy.
A)
Interest rate
In
accordance with the expected severe spending reductions, slow growth and
high
unemployment, the BoE is likely to keep the borrowing cost unchanged at
its low
level of
0.50% to boost the economy, where if policy makers decided to raise
interest
rate this will probably be in the end 2012. Another reason that makes
leaving
interest rate an inevitable action by the bank is that inflation rate
which is
predicted to retreat gradually, yet will remain above the 2% target all
over the
year. Thus, there will be no pressure on the bank to raise interest
rate as
shoring up growth will be a higher priority.
B)
APF
Further
expansion in stimulus is expected at the beginning of the year, probably
in
February
or shortly after, where another 50 billion pounds could be added, to
see the
impact of the program, launched in October, which will end in February,
and with
the release of the February's inflation report that will include the
latest
growth and inflation forecasts.
Some
BoE
policy
makers said there may be a need for more stimuli due to the high threats
posed
from euro area neighbors. Bean said the BoE will add to stimulus in
February
with the end of the program, if necessary.
Policy
maker Spencer Dale said with the
likelihood that inflation would come below the 2% by late 2012; there
are higher
chances
of expanding the bond purchases.
The
OECD
mentioned that the BoE has to add to non-standard measures by 125
billion pounds
in 2012,
where the money printing process may take part in early 2012, as the
economy
is predicted to record contraction in the first half of the year.
All
in all, the outlook for the British economy is predicted to be
dominated by uncertainty and likely to be affected by the latest
developments in
the euro
area debt crisis. There is higher probability to see a slowdown and may
be
contraction in the first half of the year due to the debt crisis and
strong
spending
cuts while a rebound in the second half is inevitable as the decline in
inflation will bolster consumer spending, where the public debt will
remain
high.
Consequently, the BoE is estimated to keep interest rate steady at its
low
level to
spur recovery while adding to stimulus early in the year to stimulate
the
economy, especially amid expectations of deceleration in prices. 
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