An Autumn Statement for consumers businesses
Chancellor of the Exchequer Philip Hammond’s first detailed economic plan is aimed squarely at households and British businesses.
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Chancellor of the Exchequer Philip Hammond’s first detailed economic plan is aimed squarely at households and British businesses.
It is the economy’s continued resilience to perceived Brexit-related threats ahead that is expected to offer the Chancellor the fiscal “headroom” he seeks.
That economic robustness will allow the Office for Budget Responsibility (OBR) to maintain relatively benign forecasts.
Current OBR forecasts:
Financial market and economic bounce backs have kept the economy on track for 2016.
However 2017 and 2018 forecasts now look like a stretch, taking into account sterling weakness/inflation strength and uncertainty assuming Article 50 is triggered no later than March.
One guide is the Treasury’s post-Brexit summary forecast of 1% growth in 2017, though in line with many early projections, it looks too pessimistic.
On public finances, the OBR must revise borrowing needs and have an eye on growth, though discretionary action by the Treasury could help.
Given that latest public sector borrowing figures show the government overshooting £55bn pencilled for 2016/17, and various tax receipts are below expectations, economists have settled on a rise in borrowing of around £10bn in the current fiscal year.
Further out, the cost of borrowing is expected to help the spending picture. Even after the recent yield ramp, benchmark borrowing costs were 48 basis points under the OBR’s 1.9% gilt yield forecast for 2017/18, though some of that benefit may be eaten up by inflation.
All told, the government might miss an earlier five-year goal for ending the deficit by 2020/21, if market forecasts pointing to a 0.5% to GDP shortfall by then are correct.
That implies c. £70bn more borrowings each year till 2020/21 before any expansion of spending intentions are known. As noted, these are likely to be pushed back rather than not seen at all.
The main themes we expect the Chancellor to target:
In the immediate term, the market can be expected to absorb a modest deterioration in public finances such as the scenarios outlined above. However, they are of course subject to myriad unknowns that will inevitably arise after 2017.
The pound
Early on Tuesday, sterling briefly rose above the closely eyed level of $1.25 against the dollar, a price that has repeatedly crimped the pound’s progress ever since October’s ‘flash crash’.
However, it appeared that hints of sterling-positive contents in the Autumn Statement might not save the pound from renewed consolidation under the ‘psychological’ $1.25 level, given that the pair failed to hold above it into Europe’s trading session.
Stocks
The primary impact on the FTSE 100 is likely to be via the conduit of sterling, where the pound ailing against the dollar has tended to lift blue-chip investors’ spirits at the expense of sterling bulls.
We believe the likelihood that the Autumn Statement will significantly depress sterling further is low.
On that basis, we do not see another major FTSE boost from weak sterling in the medium term.
Gilts
Aggressive yield gaps reported at the end of last week will have gone a long way to pricing additional signals about fresh spending that might be announced in next year’s Budget.
Even so, deteriorating finances and spending could still ratchet borrowing needs to a sum equal to the government’s already inked infrastructure spend (currently about £100bn).
With Britain’s finances set to become more challenged over the next two years the market might have to get used to relatively erratic gilt yields as ‘a new normal’.