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The August Budget: a sophomore slump?

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Second albums are always a tricky business. There is even a term for it – the Sophomore Slump – and it is something the Chancellor will have no doubt tried to avoid as he delivered his second Budget last week, just eight months after his first.
Let us for a moment cast our minds back to Wednesday 8 March, about 12.30 in the afternoon. It wasn’t one for the history books, but Philip Hammond's March budget contained some positive headlines. Borrowing was lower than expected, growth forecasts were up for 2017, and there was a range of popular giveaways in areas such as the NHS, social care, and personal tax allowances. Brexit continued to dominate the agenda, quite understandably, but most commentators would grudgingly admit that the British economy had outperformed expectations after one of the largest political surprises of recent years.
Fast forward to November and the picture looks very different. Economic momentum feels less assured. Growth has weakened, inflation has risen a full percentage point above target, and British households – the driving force behind much of our recent economic performance – look like they are beginning to feel the pinch. Indeed, confidence is hovering around a three-year low according to market research firm GfK, who think consumers are lacking any real ‘get-up-and-go’ while latest retail sales data showed the first decline in more than four years this October.
Against this background, what is the Chancellor to do in order to raise our spirits? Well, despite the somewhat gloomier outlook, common themes remain. Health, welfare, education, immigration and housing are all still on the minds of the voting public, and it was the last of these that took centre stage this time around.
A cut to stamp duty for first-time buyers was arguably the headline policy, but there was a raft of other measures aimed at tackling issues of affordability and availability of housing across the UK; particularly in major metropolitan centres. £44bn of additional funding over the next five years, planning reforms aimed at freeing up more land for development, crackdowns on empty properties and efforts to cut down on land banking all make for great newspaper headlines – but Hammond will have to be careful in striking the right balance with his wide-ranging policy agenda.
For first-time buyers, average house prices are now over five times earnings. The situation is worse still in London, where they average over 10 times. Despite low mortgage rates on offer, this makes a significant dent in household finances, with mortgage payments accounting for some 33% of mean take-home pay (65% in the capital) according to Nationwide. Few would argue with the government that reducing this pressure on household finances should be a key priority, freeing up income to be spent on more productive uses that better benefit the real economy.
However, in doing so the Chancellor must be careful. Higher house prices have no doubt created significant wealth effects across the country, which would go some way towards explaining households’ willingness to spend in recent years. The logic goes that as the price of real estate rises, homeowners feel wealthier and spend accordingly. Many would admit to having followed this logic themselves. Re-mortgaging and the availability of cheap mortgages from high street banks amplify the effect, but it is primarily based on sentiment – and the issue here is that sentiment can change quickly.
We have already seen signs that weakening house price growth is weighing on the minds of consumers, and should these latest reforms hasten any slowdown in property prices, and through this channel dampen consumer demand, spending, and GDP, the Chancellor may have much more to worry about.
Getting the balance right will be key. 
Upcoming economic releases:

Euro area inflation data for November will be the main focus of the week, with CPI figures due out this Thursday. Markets are expecting a 1.6% print, up from 1.4% in October, although this is likely to leave the policy outlook unchanged. The more important Core CPI reading is still hovering at around 1%, so we can expect the ECB to keep the stimulus taps open for some time still. Country-level data may provide some more interesting readings, particularly for Germany and France.
Tuesday will see the release of the latest Financial Stability Report and bank stress tests from the Bank of England. Consumer credit has been a key concern on the minds of policymakers in recent months, and many are expecting the central bank to tighten up its capital requirements for banks in order to take some of the froth out of the market.
We also have the OECD global outlook due on Tuesday, the US Fed’s Beige Book on Wednesday, Opec’s next meeting this Thursday, and the World Cup draw on Friday to round out the week.   

All views expressed here are the Author’s own and are based on information available at the time of writing



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Richard Conway

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