Markets give cautious response to British coalition

12th May 2010, Comments 0 comments

The London stock market rose and the British pound fell on Wednesday as new Prime Minister David Cameron formed an historic coalition between his Conservative party and the Liberal Democrats.

Investors reacted to a pledge by Cameron and Liberal Democrat leader Nick Clegg to immediately work on reducing the country's record budget deficit, on a day when official data showed British unemployment at a 16-year high.

London's benchmark FTSE 100 index closed up 0.92 percent to 5,383.46 points, helped also by positive European growth figures, dealers said.

The pound stood at 1.4844 dollars at about 1600 GMT compared with 1.4964 dollars late in New York on Tuesday. The pound was also lower versus the euro, although it had risen against both the single currency and dollar earlier Wednesday.

"The political union of David Cameron and Nick Clegg has given markets some semblance of certainty to cling to, but as with any marriage the hard work starts now," said IG Index trader Tim Hughes.

The FTSE rallied as "Bank of England governor Mervyn King gave his stamp of approval to the new government's deficit-reduction plan, labeling it 'strong and powerful'."

A day after taking office in Britain's first power-sharing government since World War II, Cameron said his Conservative party and its junior partner would take Britain in a "historic new direction."

The detailed joint policy programme published by 43-year-old Cameron -- Britain's youngest prime minister for two centuries -- included a pledge to hold an emergency budget within 50 days.

Britain's deficit stands at 163.4 billion pounds (192 billion euros, 243 billion dollars), or 11.6 percent of gross domestic product -- the highest level since World War II. The nation's economy emerged from recession at the end of last year.

"No modern government has inherited such a difficult economic situation from its predecessor," new finance minister George Osborne said on Wednesday.

"The rise in unemployment this morning is a confirmation of that and we know that we have the largest budget deficit in Europe. ... There is going to be a significant acceleration in the reduction of the structural budget deficit."

Cameron's plan to make six billion pounds of public sector savings in 2010 was deeply opposed by his predecessor Gordon Brown.

Former prime minister and Labour party leader Brown argued that such a move would derail Britain's fragile economic recovery. Cameron, however, insists immediate savings are necessary to avoid risking a return to recession.

In a further stark reminder of what lies ahead for Britain, data published on Wednesday showed the nation's jobless total increased by 53,000 in the three months to March.

At 2.51 million, the total jobless figure stands at the highest level since 1994. The unemployment rate managed to hold steady at 8.0 percent in March.

Analysts warned of further job losses ahead.

"Significant job cuts in the public sector are looming as part of the major squeeze that has to occur on government expenditure," IHS Global Insight economist Howard Archer said.

Britain's economy grew by a weaker than expected 0.2 percent in the first quarter of 2010. However, this is expected to be revised upward to 0.3 percent following strong manufacturing data for March.

Britain emerged from a record-length recession in the final three months of 2009 with growth of 0.4 percent after six straight quarters of falling output.

© 2010 AFP

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