This is out from the IMF today and very damning it is too. Effectively, as Brown decided not to say in his speech yesterday, 2010 will be a horrendous year for the UK; in many ways even worse than 2009. Deflation, Public Debt Fiscal Disaster, Increasing Unemployment - the legacy of a scorched earth policy by Labour.
The Government banks of RBS and Lloyds face such huge losses that they will have to raise capital, possibly from the government. Certainly they will not be paying any back to the UK coffers. Plus of course the Asset Protection Scheme, where the taxpayers suffer 90% of the losses on bad loans, will mean that the loan losses will be another £10 billion or so drain on the public finances.
In his speech yesterday, Brown said nothing really about cutting Government expenditure. So we will have another huge budget deficit. the car scheme for supporting European manufacturing was also extended, another piece of stimulus for the Unions.
I can see no way the Government can raise another extra £180 billion next year in the gilt market without interest rates having to go up to say 3% from where they are now. This will nail any Property or Private sector recovery as lending collapses in a deflationary environment.
So the answer will be more Quantitative Easing (QE). John Redwood has an excellent post showing that as I have always said, QE in the UK is about propping up Government spending. I think QE is a great tool for increasing money supply and velocity - but it has not been used this way.
So Brown will have another £180 billion or so of Stimulus next year. He and is Government have left themselves with no alternative. Pucker up Public Sector, you are going to be buzzing with all the stimulus headed your way.
(Post on how to trade this to follow shortly).