The aggressive 83 billion pounds of cuts in government spending announced last week will help to put the economy on a firmer footing in the future as well as serving to reassure financial markets, keep interest rates low and encourage the private sector to create and replace the jobs being lost in the public sector as part of this review.
In the short term, the prospect of 490,000 unemployed people from the public sector will put a large dent in consumer confidence, but some good news will come through in quality government capital spending as well as maintaining planned government investment in transport, schools and science. Addressing the deficit will lower debt interest payments by £5bn over the next three years. I expect this uncertainty to be compounded with the VAT increases to create a bottom to the market at the end of the first quarter 2011 but by then consumer confidence will return as there is a general understanding that the medicine has been taken and we are where we are, and the private sector plans its future and investment accordingly.
Although there will be a rocky 2011, I believe strong and sustainable growth will commence for the second quarter 2011 and accelerate in 2012.