UK economy faces years of lacklustre growth
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
n 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.
UK gilts showed the clearest response to Hammonds 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.?
CFD and forex trading are leveraged products and can result in losses that exceed your deposits. They may not be suitable for everyone. Ensure you fully understand the risks. From time to time, City Index Limited’s (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material. As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed