United Kingdom Business Forecast Report Q4 2011

Core Views
The economy is recovering, but with fiscal cuts looming and inflation running at double the official target rate, the rate of growth will be fairly tepid. Despite a fairly weak recovery, we still expect the Bank of England to hike by a cumulative 50 basis points this year and for the pound to rally against the US dollar.
Despite numerous ructions between the ruling Conservatives and Liberal Democrats, we expect the coalition government to hold firm through to the next parliamentary election in 2015.
Major Forecast Changes
On the back of fairly weak economic data during the first half of the year, we have revised down our 2011 growth forecast to 1.4% from
1.7% previously. We have also revised our policy rate forecasts, now expecting the Bank of England to hike the bank rate by 25 basis points instead of a cumulative 50 basis points by end-2011.
Key Risks To Outlook
Downside Risks To 2011 Growth: There are significant downside risks to our economic growth forecasts, particularly stemming from
the Bank of England’s monetary policy stance and the impact of fiscal consolidation.
Upside Risks To Inflation: Should the pound remain broadly weak and global commodity prices continue to edge higher, we would warn
of upside risks to our inflation forecasts.
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Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks To Outlook5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics I 8
Political Risk Edges Up After Elections
TABLE: UK MAY 5 ELECTION RESULTS8
Table: Political Overview9
TABLE: SUMMARY OF OUTCOMES FOR MAJOR UK POLITICAL PARTIES10
Domestic Politics ll 12
Assessing The Likelihood Of Scottish Independence
We believe that the chances of Scotland becoming independent over our 10-year forecast period are around 10%
Domestic Politics lll 16
Unions Ply Pressure On Government’s ‘Plan A’
Chapter 2: Economic Outlook 19
SWOT Analysis 19
BMI Economic Risk Ratings 19
Economic Activity 20
Headwinds And Policy Headaches
Having lagged most other developed states during the recovery, the UK economy is now sputtering
Table: ECONOMIC ACTIVITY20
Monetary Policy 22
MPC Striking Dovish Tone
In light of the Bank of England’s more dovish stance following its last monetary policy meeting, coupled with the inaction
on policy rates during the first half of the year, we have revised our interest rate profile for the UK
Table: Bank of England Monetary Policy Voting Decisions22
Table: MONETARY POLICY23
Exchange Rate Policy 24
Sterling Taking A Breather For Now
The British pound’s spritely run-up against the US dollar since the beginning of the year has run adrift recently
Table: EXCHANGE RATE24
Fiscal Policy 25
Additional Austerity Required In Coming Decades
The first fiscal sustainability report produced by the office for budget responsibility has one very clear message: more
austerity is needed
Table: FISCAL POLICY25
Banking Sector 26
Headwinds Mounting
Mirroring the trajectory of the broader economy, the UK banking industry recovery is choppy and uncertain
Chapter 3: 10-Year Forecast 29
The UK Economy To 2020 29
Outperforming The Eurozone
Although the UK economy plunged deep into recession in 2009, we hold to a more upbeat assessment over the
longer term and expect growth to outperform the eurozone
TABLE: Long-Term Macroeconomic Forecasts29
Chapter 4: Business Environment 33
SWOT Analysis 33
BMI Business Environment Risk Ratings 33
Business Environment Outlook 34
Institutions 34
Table: BMI Business And Operation Risk Ratings34
Infrastructure 35
Table: BMI Legal Framework Rating35
Table: Labour Force Quality36
Table: Trade And Investment Ratings37
Market Orientation 38
Table: Top Export destinations38
Operational Risk 39
Chapter 5: Key Sectors 41
Pharmaceuticals 41
Table: OTC Medicine Sales Indicators 2007-201543
Table: Generic Drug Sales Indicators 2007-201544
Other Key Sectors 45
Table: Autos Sector Key Indicators45
Table: Oil and Gas Sector Key Indicators45
Table: Defence and Security Sector Key Indicators45
Table: Infrastructure Sector Key Indicators46
Table: Telecoms Sector Key Indicators46
Table: Food and Drink Sector Key Indicators46
Chapter 6: BMI Global Assumptions 47
Global Outlook 47
Second Half Risks
TABLE: GLOBAL ASSUMPTIONS47
Table: EMERGING MARKETS AGGREGATE GROWTH48
Table: DEVELOPED STATES REAL GDP GROWTH FORECAST49
Table: REAL GDP GROWTH CONSENSUS FORECASTS4
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