|
| Unsettled, risk of storm |
| Ian Campbell / May 08, 2010, 01:11 IST |
|
UK election gloom: The UK election non-result could hardly be worse for the economy. Who will govern remains unclear. Whoever it is will be in a minority and may be incapable or unwilling to take the decisive action the UK needs. The UK risks becoming another European country with big deficit problems and insufficient political strength to tackle these.
The political horse-trading may be a matter of hours or days. But, none of the parties has a strong mandate so the next government, whether minority Conservative or Labour-Liberal Democrat coalition, is likely to face a strong opposition. That points to a weak and possibly short-lived government. For business, that is an unhappy outcome, with higher taxes more likely than stern spending cuts.
The risks of a double-dip recession, already considerable, may have become worse. Businesses may hold back on investment decisions and on hiring until the UK's political future becomes clearer - and its fiscal deficit becomes smaller.
Consumers might also be more anxious. They are now dealing with January's VAT increase and the end of the car scrappage scheme. The risk will now be that headlines about governmental strife also deter spending. The danger that the UK returns to recession this year has increased.
The rating agencies will be troubled by the risks of political indecision and weaker growth. They have been tolerant so far of a deficit that the European Commission forecast this week would be the worst in the EU this year, at 12 per cent of GDP. A greater possibility that the UK's debt pile could keep spiralling invites a rating downgrade.
The government bond market's initial reaction has been fairly calm, but the pound - hammered on Thursday by the Greek crisis and global anxiety - has weakened to almost a one-year low against the dollar. The greatest risk for the UK is that gilts follow the pound down, driving up yields and making the fiscal position still worse. If that happens, whatever UK government is in power will have to slash the deficit to regain investor confidence. Then the unsettled UK will indeed have turned stormy.
|
|
|
|
|
|
|
|
|
|
 Read Business news in |  |
|
|
|
|
|
|
Advertisements |
|
|
|
|
|
|
|
|
|
|
Content Guide
