Economic Prospects - Beyond 2011

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This week we published our mid-year review of Economic Prospects 2011. Today's blog summarises our longer-term outlook.
The next six months are critical for the global economy, and therefore the UK economy.
Even if the repercussions from the domestic and international risks we have mentioned in the last few days are limited, there are other problems that could arise in 2012.
Banking and finance
Supply and demand for finance both remain constrained. Furthermore, steps currently being taken to safeguard against future financial crises – such as banks having to hold increased capital reserves – could increase the cost of credit. It is likely to be beyond 2012 before the financial system is back to full health.
Interest rate indecision
Growth figures so far for 2011 have been disappointing. Some city analysts are now even forecasting negative growth in Q2 ahead of the GDP release on the 26th. Accordingly the MPC has so far not acted in response to above-target inflation. Following the departure of arch-hawk Andrew Sentance, market expectations for a rate rise have now been pushed back into 2012.
Politics and economics
Political shifts in 2012 are likely to add a bit more uncertainty into the economic mix. The US 2012 elections will undoubtedly be fought on the ongoing battleground of public finances; China will have a new leader by the end of the year; and a number of European leaders will be seeking re-election which could lead to a new political dynamic in the eurozone. One concern is an increase in protectionism. Protectionism was the dog that didn't bark during the recession, but it could yet bite if the global economy faces a period of prolonged weakness.

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