Budget 2009 to show sharply higher public borrowing

Tue, Apr 21 2009, 06:57 GMT
by Jeavon Lolay


Budget 2009 provides the highlight of a busy week in the UK, with the preliminary estimate of Q1 2009 GDP, the latest inflation and unemployment figures and the minutes of the April BoE MPC meeting also due. With the economic backdrop facing the UK much worse than anticipated by the Treasury at the time of the Pre- Budget Report in November, we expect sharp downgrades to GDP growth and public sector borrowing forecasts in Budget 2009 on Wednesday. Although the Chancellor is understandably hampered in terms of the corrective measures he can take at this stage, financial markets will still be keen to hear his plans for ensuring medium term sustainability of the public finances. Bond markets, in particular, will also be prepared for a sharp hike in the government’s borrowing requirement. Specific measures in Budget 2009 are likely to be relatively small, primarily aimed at helping the unemployed and smaller companies affected by the recession. Data in the US this week are expected to show the housing market remains fragile, with falls in both existing and new home sales in March. While we forecast modest improvements in a series of key surveys in the euro zone, economic growth is still falling. Canada and Sweden may announce the start of quantitative easing this week.

  • Although Budget 2009 will understandably attract the most interest in the UK this week, attention will also be drawn to a series of important economic data. The preliminary estimate of Q1 2009 GDP, due on Friday, is forecast to show output contracted by 1.7%, in line with the 1.6% drop in the previous quarter and the biggest fall since Q2 1980. The annual growth rate is projected to decline to -3.9%, from -2% in Q4 2008. The personal impact of the recession will be highlighted in the latest labour market data, which could show the number of people claiming jobless benefits rose by up to 150,000 in March, pushing the unemployment rate to 4.7%, from 2.5% last year. With joblessness likely to continue to rise sharply in the months ahead, the Chancellor is likely to make safeguarding jobs a key priority in Budget 2009. After recording the first decline since records began in 1991, annual average earnings growth is likely to have fallen for a second successive month in February, reflecting reduced bonuses. The official measure of retail sales volumes is expected to show another sharp drop in March, following on from a decline of 1.9% in February, with a significant risk that the annual growth rate turned negative for the first time since July 1992. After unexpectedly rising in February, UK annual CPI inflation is forecast to fall below 3% in March for the first time in 12 months, while annual RPI inflation may have turned negative for the first time since 1960. We expect headline inflation measures to continue to fall sharply in the months ahead. The minutes of the April BoE MPC meeting, published on Wednesday, are likely to emphasise the risks of undershooting the 2% CPI inflation in the medium term as the main reason for continuing with the £75bn asset purchase programme. We expect the decision to maintain Bank rate at 0.5% in April was unanimous.

  • It is a quiet week for economic data in the US. The weekly jobless figures, on Thursday, will be closely watched to see if last week’s fall in initial claims can be sustained. We expect the fragility of the housing market to be underlined by data showing both existing and new home sales declined in March. Durable goods orders may have dropped sharply in March, after a surprisingly strong 3.4% rise in February.

  • Leading surveys of euro zone economic activity and business confidence are expected to show modest improvements this week. However, these are from a low base and will still remain indicative of falling overall output.