How Ill is the UK?

There is one point that I think everyone agrees is the depth of the fiscal hole at a ratio of 4:1 and today’s fiscal deficits exceed those of any previous period in peacetime. Huge questions remain over the timing and content of such action.
Question is whether or when a further fall in sterling could turn into a rout. Such a loss of confidence might then undermine inflationary expectations and raise long-term interest rates. The result could b both a renewed recession and an explosive path for public debt. At the same time, a further fall in sterling seems desirable, if not inevitable. Weak demand in the euro-zone, the UK’s biggest trading partner, only makes such a fall even more necessary. This is going to be a very tricky policy performance.

What is the right economic medicine for the UK? Sterling is set for a white-knuckle ride in the run-up to the general election, as the fiscal face-off between the Conservatives and Labour keeps the UK's hefty deficit in the headlines, and investors fret about the consequences of a hung parliament.

The British economy is mired in its longest recession on record. Investment by UK businesses on new buildings and equipment plunged by a record amount over the past year. The sharp overall and ongoing decline in business investment could threaten to have significant long-term damaging repercussions for the economy's potential output.
The latest unemployment rate for the UK is 7.8%. For England it stands at 7.8%, for Scotland 7.6% and for Northern Ireland 6.3%.

Poor consumer confidence index figures in March suggest that people are losing faith in recovery after January and February rises. The 2,000 adults interviewed by GfK NOP also took a more negative view of the overall economic situation over next 12 months. This measure came in at zero, compared with +4 in February. The index also indicated that consumers are becoming more cautious about of their own personal financial situation, with this measure falling to -15 from -13 in February. With the election only weeks away the government will be disappointed that consumer confidence has slipped this month.

The upside for consumer spending will be limited for some time to come as households continue to face very challenging conditions, notably including high unemployment, low earnings growth, elevated debt levels, January's VAT hike and the prospect of further fiscal tightening ahead that will very likely include more tax hikes.