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What have we been up to


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March budget not expected to produce much cheer

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The UK market faces its final spring budget this week. From then on, this process will become an annual event to take place in November. While this was initially greeted as a sensible move, it has been thrown into question by the performance of the economy since the last budget in November last year. At that time the OBR was remarkably pessimistic about the state of the economy, and one of the features of this week will be the changes in its forecasts for GDP, particularly for 2017.
The result of the performance of the economy over the latter part of 2016 and the beginning of 2017 in comparison with the OBR’s forecasts is that the Treasury is in the happy position of being some £12bn better off than had been projected. There is no shortage of proposals on how this saving might be spent, but the Chancellor is likely to give them short shrift with only minor palliatives being produced to ameliorate current well-publicised criticisms. On the Andrew Marr Show on Sunday, Philip Hammond compared the £12bn to an increase in one’s credit card limit, positing that there was no obligation to use it. He is clearly still very concerned with the impact of Brexit on the economy and is busy building up his war chest to cope with the problems that the economy may encounter once the UK has to cope with the consequences of actually leaving the EU.
The upshot is that the budget is likely to be very unexciting, with minor hand-outs to address the shortfall of funding for social care and the steep increase in business rates faced by many in London and the South East. The first will come with the promise of a major initiative to look into addressing the significant financial problems in this area on a long-term basis, and the second with the promise of another study to look into the whole structure of raising business rates. However, I suspect that even these measures are going to be largely recouped through additional taxation. Some of this may even fall upon the ‘just about managing’ for whom any support from the current government will remain totally illusionary as they face the impending freeze on working age benefits that comes into effect next month.
While the Chancellor would not dare say so for fear of being emasculated by his pro-Brexit cabinet colleagues, he is acutely aware that there is a big difference between the economy behaving quite strongly while we are still members of the EU and how it may behave once the UK has removed itself. This distinction seems lost on his pro-Brexit colleagues who appear to think that announcing that the UK is leaving the EU is the same thing as actually departing from it. In fact, the major impact of the referendum result on the economy to date has been the depreciation of the pound which, of course, has benefitted exporters - while its flip side, the higher cost of imports, is only now starting to have an effect on consumer spending.  
Another consequence of the Brexit result was the secretive deal that the government rushed out to meet the threat of Nissan moving its manufacturing base away from Sunderland. It will be interesting to see whether a repeat performance will now be forthcoming for PSA, assuming they come to an agreement with General Motors and take over the plants in Ellesmere Port and Luton.
At least the days are long gone when the budget was anxiously awaited by the markets as a major influence on market rates. Dealers spend more time these days betting on the length of the Chancellor’s speech than they do bothering about its contents. The key meeting this week for most will be the ECB meeting on Thursday. The eurozone has surprised many with its return to something looking vaguely like acceptable growth over the past six months, and the latest Chartered Institute of Procurement & Supply (CIPS) surveys imply that economic growth in many EU countries will outstrip that of the UK. In addition, the latest inflation figures recorded an increase of 2% (with Germany at 2.2%) with the expectation that they may move higher still in the short term.
With the inflation rate now above the target rate (close to, but below 2%), how is Mario Draghi going to react? To date, Draghi has only announced that he would be ready to cut rates further and also increase and extend the QE programme. The market has already decided that another rate cut is out of the question, even if nobody expects an increase in the foreseeable future. Germany will be pressing for what it describes as a reassessment of the ECB’s ‘balance of risks’. They will argue that the fundamentals of the eurozone economy have evolved and Mario Draghi’s rhetoric about concern over recession are well past their sell-by date. Draghi has a major problem, as the ECB will be announcing new inflation forecasts this week and the 1.3% forecast made in December now looks absurd. 
Perhaps Draghi will take a leaf out of Mark Carney’s book and go for a ‘look through’ solution. It would be much more justified in his case, as the underlying inflation rate in the eurozone is still very low at 0.9% and the current rapid rise of the CPI measure has been almost entirely driven by the depreciation of the EUR against the USD. However, in Germany (buoyed by the likelihood of a large increase in its industrial production figures being announced the previous day) many will be looking for a reversal in tone. Considering Germany’s strong dislike of QE, it will be interesting to see whether we start to see forecasts predicting a curtailment of the current programme.
New economic releases are thin on the ground in the UK this week, with only the trade figures and industrial production data being released on Friday. The trade figures will narrow slightly in response to the weakening pound which has benefitted exports, while the industrial production figures are likely to show a small fall, being a reaction to the major increases seen in December and January. However, the main event on Friday will be the release of the latest US non-farm payroll figures. The market is currently trading on a 98% probability that the Fed will raise rates at its meeting next week and that nothing other than a very disappointing set of figures will derail this prospect. Current expectations are for the payroll figures to come out just below 200,000, the unemployment rate to remain at 4.8%, and the average earnings figures to show a bounce-back upwards from 2.5%.

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






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