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United Kingdom: More fiscal tightening probably needed – Wells Fargo

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 4, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Research Team at Wells Fargo, suggests that even under the “best case” scenario of solid growth in nominal GDP (5.1 percent per annum), low average borrowing costs (0.90 percent) and continuation of the 2.6 percent primary deficit, which is the lowest ratio since 2007, the government debt-to-GDP ratio would only edge down from nearly 90 percent at present to about 78 percent in 2030.

    Key Quotes

    “If, as seems likely, the United Kingdom is not able to achieve strong GDP growth while at the same time enjoying the record low borrowing costs that exist today, then the British government will need to engineer further fiscal consolidation in order to reduce its debt-to-GDP ratio.

    The good news is that the government of Prime Minister Cameron plans to turn its primary deficit into a modest primary surplus over the next few years. The bad news is that fiscal tightening tends to exert headwinds on economic growth, at least for a period of time, which makes achievement of lower debt-to-GDP ratios more challenging. Consequently, the British government may need to figure out ways to raise productivity growth in the U.K. economy. In the face of the contractionary effects of fiscal tightening, stronger productivity growth would help to shore up the rate of economic growth, thereby making debt sustainability easier to achieve.”
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