UK Spring Statement: Growth up, narrower deficits – Nomura

In the recent UK’s spring statement, growth was revised up in the near term by one or two tenths, but down modestly towards the end of the forecast horizon, notes the research team at Nomura.

Key Quotes

“This led to the output gap being revised into positive territory in the near term (the forecasts were sub-zero in the November Budget), which meant a slightly larger structural deficit relative to headline.”

Deficit forecasts: Stronger growth forecasts meant lower deficit numbers. In total, the deficit has been cut over a period of six years by around £20bn, £4.7bn of which was seen this year. If the OBR is too pessimistic about the final two months of the fiscal year then the deficit could turn out even lower than what is forecast. While the Chancellor announced no new spending plans in this statement (it was, after all, an update rather than a “fiscal event”), he did say that if the deficit numbers to continue to improve relative to expectations there may be room to spend more come the Autumn Budget.”

Gilt issuance: One of the points of the Spring Statement replacing the Budget was that it would be a stripped down affair with limited implications. The Chancellor has certainly achieved his aim as far as the Gilt market goes. Gilt issuance for 2018-19 is projected to be £102.9bn. This is in between our call (£104.5bn) and consensus (~£101bn) and close enough to both that there is no strong market reaction. In terms of the split of issuance, a little more is in shorts and a little less in longs and linkers than we had forecast, but not much.”

Fiscal stance/rules: With no major policy announcements there was little change in the fiscal stance (only due to output gap revisions), and the Chancellor’s rules (flawed as they are) were met to broadly the same degree as they were in November.”

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