The Chancellor of the Exchequer, Alistair Darling, forecast a 3.5% contraction in 2009, making it the biggest deficit since World War II. The current projection, of 3.5% is twice as big as the November estimates when the global economy entered into a strong contraction phase.
Currently, the Treasury projects that the country will run a 146 billion pound deficit this year, the biggest on record. This will put upside pressure on the gilt’s yields, meaning that investors will demand more money to fund the U.K. deficit. However, the Bank of England has already acted to counter this, by having direct (and public) interventions in the gilt markets, the U.K’s government instrument to borrow from the financial markets.
For now, the U.K. economy outlook is lying to the downside. Earlier in the day, a report showed that the labor market hit the lowest level in a decade, as the unemployment rate hit a 12-year high. Currently, the OECD estimates that the U.K. economy will contract 4% in 2009, slightly less than the U.S. and the Euro-area
During the Chancellor’s press conference, the pound plunged against the other major currencies. The pound lost 180 pips in less than 30 mins against the dollar, and 100 pips against the euro in a similar period.