The results of the introduction of huge financial incentives in the UK is evident. Already seen the first signs of recovery. Rather, a recession in the UK will end sooner than expected. However, there are several serious problems that may hinder recovery in the medium term and lead to the growth of GDP in the next few years will be less stable than in the previous decade. This recession was deeper than we expected, but after the GDP revision for the 1 quarter down to draw even more gloomy. As a result, we lowered the forecast for annual GDP in 2009. from -2.8% to -3.5%. Increased demand in the manufacturing, construction and investment sectors, as well as among households has proved far less significant than we had projected six months ago. Nevertheless, the fall of the British economy seems to be completed in 2 and 3 quarters, and our basic forecast for the second half of 2009. implies some semblance of recovery (Bank of England announced the rate increase as early as 1 quarter of 2010.). Together with the expected fall in housing prices still about 6% in 2009. This can lead to a vicious circle will turn into a “virtuous circle” (a more optimistic economic data and data on housing prices contributed to the improvement of the situation with the banks’ balance sheets and growth in lending). However, in 2010. the pace of recovery will be below average.

Uncertainty about the baseline scenario

The degree of uncertainty around the baseline scenario is higher than usual. In particular, we know virtually nothing about the depth and the synchronism of the world recession, as well as on the response of the global policy. This recession was more serious than we anticipated, and the medium-term challenges facing the United Kingdom, will lead to a relapse. Our bottom-up forecasting involves the transformation of some of the closed circles in the “virtuous circle”. The impact caused the welfare of households, provokes an increase in the labor market. Since 2010. this will lead to increased domestic demand without increasing inflation. Descending projection assumes that the sharp increase in savings will cause a slowdown in consumer spending in all areas. Given the early signs of recovery, we anticipate that in the 2 quarter GDP growth will be insignificant, but in 3 and 4 consecutive quarters will be modest (though not fast) growth. In our view, the forecasts that growth in Britain will begin only in the 4 th quarter or early in 2010. Too pessimistic.

Some signs of recovery

We have already seen the first signs of recovery: improving consumer and business confidence, a sharp rise in the index PMI and the real signs of life in the devastated housing markets of Great Britain.

Britain took the good position for a rapid exit from the crisis

After a sharp drop in GDP in the quarter, we expect 1 (slight) positive growth in 2009. (although recent data on low-volume industrial production increased a slight risk of recession). Prospects for a rapid withdrawal of the British recession due to the following:

1) A strong depreciation of the pound in the past: can we talk about a restoration of trade-weighted pound, but that about 20% lower than July 2007. Apparently, the trade deficit has stabilized and is slowly beginning to be corrected after a decade of increases. Real GDP growth at the expense of net exports for five consecutive quarters of a neutral or positive.

2) Payment of interest by households: High levels of household debt, although it is a problem for the UK in the medium term, together with a large number of people that have mortgages with floating rates, means that lower interest rates, in general, helped households.

3) The cycle of movement of stocks: The fall in GDP is due and the situation of stocks in five of the last six quarters. To ensure the growth needed to reduce the amount of stock. We think that the impact of stock to GDP growth during the remainder of 2009 will be either neutral or positive. Synchronous and rapid onset of a recession, for example, can be attributed to the use of such methods of production that involve performance of work “just in time.” Therefore, it can be assumed that the restoration and the subsequent resumption of stock will be as rapid.

4) Waiver of reducing the VAT rate: It is planned that, on 1 January 2010. standard VAT rate will be increased from 15 to 17.5%. This can lead to a temporary shift in consumer spending at the end of this year, which would to some extent contribute to an increase in such costs. Of course, such a measure could slow growth in early 2010.

Medium-term challenges

Despite the recession, the UK has a long way to ensure the long-awaited restoration and maintenance of loans to households (and in the banking sector). As in some other major economies of the vast implications of the package of incentives to encourage the emergence of globally increasing the risk of inflation, the need for fiscal tightening since the recession and the prospects for taking the hard decisions in regard to monetary (and financial) policy.

• Restoring the balance: Speaking of rebuilding the British economy, people tend to imply the removal of the current account deficit, due to relatively low levels of household savings. It is the transition to an economy in which the financial sector and the consumer is playing an equally significant role in the economy, a more important role for the manufacturing sector, business investment and exports. A strong depreciation of the pound, which happened in the past two years, should significantly contribute to the restoration. Also limiting the size of the UK financial sector could help regulate the banking sector. Households are likely to increase savings in subsequent years.
Any significant rebalancing involves changes in the British economy, and now the country was undergoing such a change in the near future, the Bank of England will probably not want to stand in the way of such a recovery.

• Reducing the proportion of borrowed capital: British households were still buried in debts, and the British banking system is still far from full recovery. British households may want to reduce over time the tax burden, and banks are likely to want to reduce the deficit financing (loans – deposits).

For savings and debt repayment by households needed incentives:

1) Households with high debt and, therefore, very sensitive to changes in interest rates. However, it is less important than the stable rates, the easing of lending conditions and a surplus in the labor market. The credit crisis has shaken the faith of households in the fact that all this will continue in the future. 2), it is unlikely that the cost of housing will grow enough to contribute to the increased well-being. 3) The volume of lending are likely to remain small. 4) The levels of negative equity are likely to be those of high and 2009/10g. Banks need a long time to reduce the volume of lending, as well as between consumer loans and consumer deposits, there is a structural imbalance, which over time should be less noticeable. The report on financial stability (Financial Stability Report), published by the Bank of England, reflected this disparity that exists for some time. The report also states, and deficit financing in the amount of consumers 800 billion pounds for major UK lenders. In addition, the funding gap remains, and the banks continue to use the securities guaranteed by the Government.

• Policy changes: Discount rate is at a minimum level since the founding of the Bank of England at 1694g. And, according to the Ministry of Finance, the level of net public sector debt as a percentage of GDP, which is almost twice the previous “limit” set ” sufficient investment rule “(sustainable investment rule). We are unaware of the depth and matching the global recession, particularly given the retaliatory measures taken worldwide. As a result, politicians have to make difficult decisions, given the general uncertainty. Of course, in the future need to tighten monetary and fiscal policies (subject to certain sight restoration), but is difficult to assess the timing and magnitude. And should the likelihood of serious political mistakes than before.

Unstable growth, and vulnerability

What could cause all of these medium-term problems? In spite of that, that fall back into a deep recession, it is unlikely they are (as already planned activities, such as the Olympic Games 2012g. In London) will likely continue to increase the volatility of growth in the coming years. What it will be higher than during the decade preceding the credit crunch. This can be attributed (at least) the following two factors:

1) change the expectations of households and firms: Is it possible, the Bank of England had no illusions about the ability to infinitely “great stability” (eg, first described King as chairman in October 2003.), But households and companies are forced to change their expectations. Recent events could seriously hurt their feelings. If here to add the loss of faith in the possibility of politicians (and credit) to alleviate the situation, economic agents may themselves take actions that will strengthen the cyclical fluctuations in the background of economic instability. For example, companies and households can reduce the cost / investment to increase reserves in the event of economic downturn, rather than take a little longer, or simply to take no action.

2) The reserves, reinforcing cyclical fluctuations: rather than act as a buffer for the business cycle, changes in inventories can enhance fluctuations. We continue to believe that recovery will be insignificant, while it can still be very volatile.