UK: Market response to Autumn Statement - Westpac

Tim Riddell, Research Analyst at Westpac, notes that the UK Chancellor Hammond presented the first Post-Brexit fiscal assessment for the May Conservative Government and it can be safely said that much of the impact was diffused by the leaking of the content over the past two weeks.

Key Quotes

“It proved to be a remarkably conservative (stressing the small “c”) event but holds some concerning aspects which could weaken investor confidence.”

“Of key interest for non-domestic investors are the changes to GDP forecasts, budget deficits and the dropping of any commitment towards a balanced budget date in order to provide greater flexibility. Great uncertainty remains with respect to just how Brexit negotiations impact the economy, tax receipts, spending needs and business investment (outside of the proposed infrastructure investmetn fund).”

“The key takeaways for non-domestic investors are:

• Growth profiles are lowered into 2021-22 from the March Budget but are slightly higher than the immediate post-Brexit estimates.
• The projection of growth at the end of the forecast period with be 2.4% than the pre-Brexit profile
• Increased cumulative budget deficit of GBP122bn (peak of debt to GDP of 9-.2% in 2017-18) over the previous forecast period
• Removal of budget balancing target to provide flexibility, but means that 2021-22 still has a deficit forecast of GBP17.2bn, so the effective change is actually GBP139bn to 2022
• Infrastructure investment fund of GBP23bn funded by extra borrowing
• Corporate tax to be lowered to 17%
• Raising of personal tax thresholds and national living (minimal) wage to support JAMs (Just About Managing Households)”

“The implicit uncertainty over what Brexit negotiations will mean for UK’ economy, tax take and spending needs (EU contributions may well be larger and more prolonged than currently assessed) mean that the markets are likely to consider that the majority of risks to the ONS/Government’s profiles are to the downside on growth and an increase to deficits.”

“Any increase in uncertainty over Brexit negotiations and concerns over delay should the Government’s Supreme Court Appeal rule against the Government’s proposed triggering of Article 50 could see a return to GBP weakness.”

“Overall, this was an Autumn Statement engineered to underwhelm given the level of budget blowout that is already baked in the Brexit economy. An initial positive stance on the basis of no shocks in understandable. However, material risks to the budget and growth profiles remain. Should Brexit negotiations become acrimonious there will be an increase in uncertainty that will undermine the economy, deficits and GBP. Even if negotiations prove to be skewed towards a "soft" Brexit, this may involve more prolonged UK contributions into EU which could see a greater deterioration of the budget rather than be offset by a firmer economy and tax-take.”

“Although providing little to shock markets, the realisation of a much greater increase in borrowing requirements should increase yields, as stated, and should cap GBP.”