UK Economic Forecast

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The Labour prime minister, Tony Blair, will resign in mid-2007, when he will probably be replaced by the current chancellor of the exchequer, Gordon Brown. Mr is unlikely to enjoy much of a "honeymoon period" when he takes over. Not only do opinion polls suggest that he is no more popular with voters than Mr Blair but he will inherit a tired party driven by personal feuds and will face an opposition Conservative Party enjoying a revival under its telegenic and personable leader, David Cameron. Monetary policy is currently in a phase of tightening, but following a surprise increase in January official interest rates are now at or close to their peak. Given the state of the public finances, an increase in taxes still seems likely in 2007, if the government is to restore the credibility of its fiscal "golden rule" (which prohibits it from borrowing to fund current spending over the course of an economic cycle). Real GDP growth is estimated to have expanded by 2.7% in 2006, but is forecast to slow in 2007-08 as macroeconomic policy tightens. Inflation will exceed the central target of 2% of the Bank of England (the central bank) in the near term, but should fall back below 2% in 2008. Sterling's trade-weighted exchange rate will appreciate further
in 2007, before weakening in 2008. The deficit on trade in goods, which has risen sharply over the past five years, should stabilise in 2007-08.

Key changes from last update


Political outlook
An ongoing police investigation into party funding continues to sap Mr Blairs authority, but it is unlikely to force him from office.


Economic policy outlook
In January the central bank raised its repo rate by 25 basis points to 5.25%. The move took financial markets by surprise, but the Economist Intelligence Unit does not believe that it has raised the likely interest-rate path in 2007.

Economic forecast
Stronger than expected GDP figures for the fourth quarter of 2006 have caused us to raise our forecast for real GDP growth in 2007 to 2.5%.