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Expectations were low for anything meaningful to emerge from the UK’s first pared back Spring statement; the Chancellor, however, was keen to shake off his Spreadsheet Phil label, likening himself instead to Tigger. He delivered upgraded growth forecasts and noted improvements in public finances. Total public sector borrowing fell, but there was an increase in the forecasts for annual debt interest payments reflecting the rise in gilt yields and the expectation for an increase in the bank rate. The country is (at last) reporting a small current account surplus, meaning it only needs to borrow to fund capital investment.
The read-through is that tight fiscal policy will continue for the immediate future, and the Chancellor has definitely done the right thing by ‘banking’ some of that fiscal headroom, resisting calls for higher Government spending. While economic performance has been better than that predicted by ‘Project Fear’, we need to note that the tailwinds of global growth have been positive and the headwinds of a post-Brexit world are not yet having a real impact. However, the tone was definitely more optimistic, with a promise of spending increases should the improvement in public finances continue.
The markets decided to focus on the Chancellor’s prediction that real wage growth would turn positive in early 2019 – good for personal finances and potentially consumer spending, and therefore raising the prospect of higher interest rates.
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