UK reaction: Spring Statement - a more positive outlook

UK reaction: Spring Statement - a more positive outlook

Market commentary News
13 March 2018

David Page, Senior Economist at AXA Investment Managers (AXA IM) comments on the Spring Statement.

Chancellor Phillip Hammond delivered his first Spring Statement, a scaled back fiscal projection update with no policy announcements.

  • The Office for Budget Responsibility (OBR) edged its GDP growth outlook higher to 1.5% in 2018 (from 1.4%). This was despite a more material increase in the global outlook. It modestly reduced its outlook for 2021 and 2022.
  • The public finances outlook improved. Deficits were projected £20bn lower over the forecast horizon, the current budget is now projected in surplus in 2018-19 and debt is projected to peak this year and narrow to 77.9% of GDP (down from 79.1%) by 2022-23.
  • Gilt and T-bill sales are unaffected this year. But forecast improvements should lower gilt issuance by £10bn next year. The Debt Management Office (DMO) targets £103bn gilt sales in 2018-19, this would be the lowest since 2007-08.
  • The projections represent further steady improvement, but rely on a steady economic backdrop (which Brexit and the global cycle could threaten) and current policy. Chancellor Hammond will come under intense pressure to loosen the purse strings at the time of the next Budget this Autumn.   

Chancellor Phillip Hammond delivered his first-of-a-kind Spring Statement. This statement was designed to meet the statutory requirements of delivering a second fiscal update to Parliament. However, unlike Pre-Budget and Autumn Statements of old, this statement specifically did not include fresh policy initiatives and was much shorter than previous equivalent Statements at around 20 minutes. As such, Chancellor Hammond provided the OBR’s latest economic and public finance projections. With these modestly more upbeat, this provided an upbeat Chancellor with an opportunity to rehearse the government’s achievements.

The OBR made modest changes to the economic outlook. The OBR had forecast 2017 growth at 1.5%, however, official revisions at the end of 2017 actually saw growth raised to 1.7%. The OBR also increased its outlook for 2018 growth to 1.5% (from 1.4%). It left subsequent years unchanged at 1.3% for 2019 and 2020, but revised GDP growth to 1.4% for 2021 and 1.5% for 2022 (both 0.1% point lower than in November). On balance, the changes to the growth outlook were underwhelming with 2018’s upgrade outweighed by medium-term downgrades. These forecasts also took place against a projected firmer global backdrop (where the OBR upgraded its outlook by 0.2% point per annum for 2018, 2019 and 2020). The OBR growth outlook remains softer than our growth outlook of 1.7% and 1.8% this year and next.

The OBR also updated its outlook for the public finances. Improved monthly finances point to a lower deficit for 2017-18 and the OBR lowered its deficit forecast to £45.2bn (-£4.7bn from November) and 2.2% of GDP, the lowest deficit since 2001-02. The OBR also reduced the deficit outlook over the forecast horizon, with future expected downgrades totalling £15.5bn. The UK deficit is expected to narrow from 2.2% this year to 1.8% in 2018-19, 1.6% in 2019-20, 1.3% in 2020-21, 1.1% 2021-22 and 0.9% in 2022-23. The OBR’s projections included a current surplus (borrowing only to invest) in 2018—19. Meanwhile, lower projected deficits saw the debt outlook improve with UK debt expected to peak this year at 85.6% of GDP before falling back to 77.9% in 2022-23 (down from 79.1% expected in November).

Relatedly, the gilt financing outlook reduced. 2017-18 saw no change to planned gilt (£115bn) or T-bill (£9.5bn) issuance, with the slightly lower projected cash deficit (£40.3bn, down £3.1bn) and higher funding from National Savings (£2bn) being held as short-term assets. These assets will be unwound in 2018-19, which combined with a reduced cash deficit outlook and modestly lower redemption value, should reduce gilt issuance in 2018-19 by £10bn. The DMO remit includes a £102.9bn gilt sales target for next year, which would be the smallest gilt issuance since 2007-08. 

Whether these projections end up a reality will be due to a number of factors.

  • Our own outlook is for a modestly more upbeat outlook for UK economic activity over the coming years, which should narrow the budget deficits further. However, this assumes the announcement of a transition deal next week and that such a transition phase is likely to be longer than the current 2-years or so being discussed. The Brexit process remains a key downside risk to the outlook.
  • We also note that the OBR’s global growth forecasts show consistent expansion 3.7-3.9% over the coming five years. Over a five-year period there is a strong possibility that the global economy sees a renewed downturn, which would also likely weigh on UK economic activity.
  • These projections assume unchanged policy. Chancellor Hammond evaded calls to increase spending at this statement, saying that if the finances continued as expected there would be “capacity to raise public spending in the years ahead”. This appears likely and could undermine the scale of projected deficit retrenchment.

Today’s OBR outlook shows further marginal improvement in the outlook for the UK finances. However, we caution that with the number of challenges still faced by the UK economy, both economic and political, the Chancellor was wise to keep his powder dry at today’s statement. Political pressures will build on him to be more generous at the Budget later this year.

Market reaction was relatively muted given the lack of policy announcements. 10-year gilt yields edged lower by 1bp to 1.47%. 2-year yields were unchanged at 0.83%. Sterling firmed by around 0.4% to the US dollar and 0.2% to the euro.  




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