UK Economy Faces Years Of Lacklustre Growth

UK Economy Faces Years Of Lacklustre Growth

City Index  | Mar 13, 2018 16:43

Whilst it was expected to be a fairly bland affair, Philip Hammond tried very hard to talk up the economy. With no tax or spending announcements, the market’s focus was specifically on the economic growth and public spending forecasts. Except from a splattering of good news over government borrowing, there were few reasons to cheer.

On an upbeat start Philip Hammond announced that the OBR had upwardly revised the economic growth figures for 2018 to 1.5% from 1.4% reflecting the resilience that the UK economy is showing in the face of Brexit uncertainties. GDP for 2019 and 2020 where kept constant, whilst growth forecasts for 2021 and 2022 were revised downward.

Digesting these figures, there was actually little to cheer despite the upbeat presentation from an unusually positive Hammond. Whilst an upward revision for 2018 is certainly something to be excited about, let’s not lose track of the fact that this is the first time in modern history that GDP growth is forecast to be below 2% for each year forecast (until 2022). A woeful outlook by historical standards. And this is still subject to Brexit related uncertainties. Regardless of how positive Hammond’s performance, there is no escaping that at a time when the rest of the world is booming, the UK is staring an extended period of weak growth in the face.

Government borrowing declines

On a more positive note government deficit will be just £45billion as government borrowing drops to 2.2% in 2017-18, declining to 1.8% in 2018-19 as Britain’s debt burden falls. Another positive was that the U.K. is no longer borrowing for day to day spending as the books have finally been brought under control. But just because spending is back on track, this doesn’t mean the end of austerity. Even with extra coffers in his chest we don’t expect the Chancellor to go on any big spending sprees in the Autumn Budget, instead he will almost certainly play it safe, keeping any extra to cushion from Brexit uncertainties.

Market response

UK gilts showed the clearest response to Hammond's Statement, rallying on the news that the government won’t be borrowing so much, which sent yields lower. EUR/GBP dipped 0.2% to a low of 0.8852 and GBP/USD also rallied through the statement hitting from a low of $1.3874 prior to the statement to $1.394 shortly after. However, it is difficult to decipher how much of GBP/USD movement that was due to the Spring Statement and how much was due to US inflation numbers released at the same time, along with news of Tillerson leaving Trump’s administration.

US Goldilocks Inflation report spot on to support bullish sentiment

US inflation printed bang on expectations. Inflation ticked up marginally to 2.2% in February, from 2.1% in January, whilst on a monthly basis inflation increased 0.2% versus 0.5% in the previous month. Core inflation increased 1.8% year on year. The numbers in line with Friday’s weaker wage growth confirm that investors don’t need to fear an overly aggressive Fed. The Goldilocks report, not too hot to require a faster pace of tightening and not to cool to concern investors, provides optimum conditions for Wall Street to rally, which it did, whilst the dollar declined on an easing of concerns of a more aggressive path of tightening from the Fed.

The White House’s Revolving Door

Wall Street hasn’t been able to hold its gains, with all 3 major indices in negative territory, as concerns over the revolving door at the White House are unnerving investors. This time Secretary of State Rex Tillerson was pushed out the door, to be replaced with CIA Director Mike Pompeo. Whilst Trump has openly said he encourages conflict and chaos, so many changes to a team begs the question whether anything can really get done?

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.

Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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