What to take from Chancellor Osborne’s Autumn Statement

This morning the Chancellor George Osborne presented his Autumn statement and emphasised that the “economic plan is working but the job is not done”. The chancellor highlighted the impressive improvements in growth, unemployment, inflation pressures and forecasts which suggest these developments will continue. The key points are below:

UK Growth

• The Office of Budget Responsibility (OBR) now project growth this year will be 1.4%, raised from an expected 0.6% in March. 
• Next year’s forecast has also been revised upwards to 2.4% from 1.8%, with the following four years growth expected to be 2.2%, 2.6% 2.7% and 2.7%. 
• The OBR have shed light on the risks to growth, claiming the eurozone will shrink 0.4% this year. 
• Unemployment is expected to fall to 7% in 2015 and 5.6% by 2018, with an expected 400k additional jobs. 
• Private sector job creation will reach 3.1m by 2019 according to estimates. 

Public Finances 

• OBR have revised underlying public sector net borrowing down to 6.8% down from 7.5%, dropping to 5.6% next year, and predicts a small budget surplus by 2018. 
• The Borrowing forecast is down by £73bn in the next few years, with an estimated £111bn being borrowed this year and £96bn next year. 
• The chancellor has introduced a cap on welfare spending, however this excludes pensions. 
• There will be an updated charter of budget responsibility to be presented to the parliament next year. 
• Pensions will rise by £2.95 a week from next April, and the state pension age will rise to 68 in the mid-2030s, up to 69 in the mid-2040s. 

Taxes

• From 2015 capital gains tax on home purchases/sales from non-residence will be introduced. 
• The Bank Levy will increase to 0.156%, raising an additional £2.7bn next year and £2.9bn a year for 2015-16. 
• There will be further tax breaks for shale gas, with the tax rate being halved on early profits. 
• Up to £1000 tax allowance will be transferable between married couples. 
• Jobs tax to be abolished for people aged under 21. 

Businesses

• Rate relief scheme for small business will be extended for another year. 
• There will be a cap increase on business rates at 2% from next year. 

Living standards

• The freeze on fuel duty will continue, meaning next year’s planned rise will be cancelled. 
• Green levies on energy bills will be rolled back, therefore cutting £50 from bill increases. 
• Average rail prices will be kept constant in real terms.

Sasha Nugent

Currency Analyst

Caxton FX

Osborne's Autumn Statement

George Osborne provided few surprises in his Autumn Statement earlier today. Growth projections for the UK economy were revised down significantly from over-optimistic figures from the March Budget. Tight credit conditions and external dangers will ensure a rocky recovery for the UK economy over the next few years. One notable success though has been the UK labour market, which has showed some strong improvements this year, with 1.2m extra jobs found under the current government. 

A key theme to take from the Office of Budget Responsibility is that the UK is in a weaker position in terms of both growth and its finances, when compared to the last update in March. This of course highlights the risks of a cut to the UK's AAA credit rating in the early months in 2013. In terms of sterling's performance in reaction to the day's events, the response has actually been pretty muted, which is a pretty good result in the circumstances.

Below is a summary of the key announcements made by George Osborne today.

Economy and Government Spending

·         The Office for Budget Responsibility expects GDP to contract by 0.1% in 2012, significantly down from forecasts of 0.8% growth in March. The OBR then expects the UK economy to grow by 1.2% next year.

·         The government’s fiscal consolidation programme is to be extended by another year to 2017/2018.

·         The UK budget deficit is set to fall from 7.9% last year to 6.9% this year.

·         National debt will not begin falling until 2016-17, a year later than previously expected.

·         UK unemployment is expected to peak at 8.3%, lower than initially expected, and employment is expected to rise every year moving forward.

Taxes

·         There is to be no new tax on property (“mansion tax”).

·         40% tax rate threshold will rise from £41,450 to £41,865 in 2014 and then £42,285 in 2015.

·         Corporation tax will be cut by another 1% in 2014, taking the rate to 21%.

·         Inheritance tax will rise by 1% in 2013.

·         Tax free allowance raise is to rise by £235 to £9,440.

·         Planned 3p rise in fuel duty not just postponed but cancelled.

Benefits and Pensions

·         Most working-age benefits to rise by 1% per year over next three years.

·         Child benefits are also to rise by 1% per year over two years from 2014. 

·         Tax relief on the largest lifetime pensions reduced from £1.5m to £1.25m starting in 2014-15, the annual allowance will now be £40k rather than £50k. 

UK trade deficit narrows to an 18-month low

Trade balance data for July has revealed this morning that the UK trade deficit has narrowed to a February 2011 low of 7.1B. This was lower than the 8.9B deficit that was anticipated and significantly lower than the 10.1B deficit shown in August. 

At 9.0%, overall export sales growth was at its highest level since 1998. Sales of goods outside the eurozone grew by 11%, while somewhat surprisingly, sale of goods to the eurozone even grew by almost 8.0%. More positive news for the economy, then, and it certainly takes some of the considerable pressure off the UK government.

It is encouraging to see UK businesses respond to the challenges facing them, in the form of low confidence and deteriorating economic conditions in the eurozone, by diversifying their global trade relations. Increased take-up from the US, Asia (especially India) and South Africa all contributed to this morning’s improved figure. Oil exports to the eurozone was also a key factor in helping the July trade balance bounce back from June’s disappointing showing, which was the worst since modern records began 15 years ago.

Once again this points to a rebound for UK GDP in the third quarter. Awful trade balance figures were a real drag on growth last quarter, which unless we see another dramatic reversal in August and September, will not be the case in Q3. It goes without saying that this figure does not change a very uncertain outlook for UK exporters. The flow of bad news out of the eurozone has been stemmed somewhat over the summer but for as long as the region’s economy contracts, a cloud will remain over many UK businesses. Nonetheless, this is again good news for the UK and no doubt Chancellor George Osborne will sleep a little easier tonight.

Richard Driver

Currency Analyst

Caxton FX

Sterling fails to sustain gains after sharp inflation rise

One would expect a 0.5% surge in a headline inflation figure which was already double the BoE’s official target to give sterling a genuine and sustained boost. This has not been the case today, sterling has erased the pretty decent gains it made in the build up to the data release, to trade flat on the day presently.


Why? There seems to be a feeling that UK inflation can go as high as it likes (within reason!), the UK economy is just too flimsy to take a rise in borrowing costs. The subsequent BoE letter to Chancellor George Osborne pointed to the economic risks of bringing UK inflation back down to target quickly. There was definitely a sense that the BoE will wait, or given little option to wait until the very end of the year at the earliest.

Sterling is benefitting from the current euro-weakness at present but if and when this Greek issue is swept under the carpet for another year, it seems likely that the awful sentiment towards the UK economy could weigh on sterling moving forward.

In the very short-term, sterling can look to tomorrow’s UK unemployment data, MPC minutes, and Thursday’s UK retail sale data. I’m tempted to think not even a hawkish minutes will convince the market it is genuinely considering raising rates before the end of the year. On a more positive note, UK retail sales are forecast to improve significantly. However, a strong figure will only be a starting point I’m afraid, market participants will require a lot more.

Richard Driver
Analyst – Caxton FX


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MPC Minutes dishearten investors but high hopes for change were misplaced

After a long time out of the spotlight, the UK again took prominence today as the minutes from the MPC’s March meeting were released this morning. In addition, we saw Chancellor George Osborne announce the UK’s 2011 budget earlier today. The former caught the eye but the latter left the market unperturbed.

Central bank interest rates are the real market-mover at present and an insight into policymakers’ views will always attract attention. The minutes revealed that Andrew Sentance’s hawkish camp failed to coax a fourth MPC member to join their campaign to increase interest rates. Had they succeeded in this, the outlook for a BoE rate rise as early as May would have been greatly improved, particularly in light of yesterday’s appalling UK inflation figures (4.4%!).

On release of the news, sterling dropped sharply across the board, and investors may well have been disappointed by the lack of any real increase in hawkish language adopted within the minutes. Indeed if anything, the tone reflected additional uncertainty following recent global developments, which will likely cloud the UK’s economic outlook.

Osborne’s budget announcement today contained a wide range of interesting material; the headline was probably Osborne’s downward revision of the UK’s growth forecast for 2011 to 1.7% (from 2.1% - itself an already downwardly revised estimate) but sterling has survived this hit relatively unscathed.

Sterling has actually lost little ground to the euro today as some bad news from the eurozone irritated the markets. It has been announced that the EU Summit this weekend will not be reaching a final decision on the ever-troublesome bailout fund. Given that the markets had grown in enthusiasm after initial progress at a preliminary summit, and that they would get a definitive answer this Friday, the delay of the decision until June seems to have frustrated euro-investors. Concerns have also mounted with regard to the Portuguese Parliament’s vote on its government’s austerity measures, which if rejected will almost certainly see its PM resign, and could well be the catalyst for a Portuguese bailout.

At present, sterling remains in limbo around €1.15 with another trigger needed to define direction.

Richard Driver
Analyst – Caxton FX


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Sterling plummets as economy contracts

There was a shock to the system today, as the pound endured the currency equivalent of falling into an ice cold lake. GDP figures released this morning showed that the British economy contracted by 0.5% in the three months through December.

Although this was a first estimate, the realisation at just how poor these figures were (market forecast was a full percent higher) caused the pound to sink across the board. It fell over 2 cents against the US dollar and a cent over its euro neighbour in just a matter of minutes.

With Johnson out, the incumbent Shadow Chancellor Ed Balls will be smacking his lips at the prospect of getting stuck into Tory manifesto, hounding Cameron and Osborne for “complacently congratulating themselves” for securing the economic recovery back in the Autumn and urging the government to pause and "rethink" its deficit-reduction strategy.

Indeed it appears the back slaps may have been a little hasty. With the economic recovery grinding to a halt, arguments for an interest rate rise will surely have gone into full retreat. Adam Posen is another man who probably wore a wry smile on his face today. His dovish stance is likely to have attracted some followers among the MPC members, although an accompanying vote for QE is less likely with inflation as high as it is.

The question is, just how much will this new data affect policymaker’s decisions? It’s worth noting, however excitable/nervous the market gets over this figure, it’s only estimated data - I’m not expecting the Bank of England to fully reassess the strength of Britain’s economic recovery at this stage. We did also see a staggeringly bleak December weather-wise, and history tells us that the UK isn’t overly competent in the snow. How much did this adverse weather affect our growth? Osborne, understandably, thinks a lot.

What this data has done is to mark a substantial step back for Britain, and it could force downward revisions to both 2011 and 2012 growth forecasts. Sterling’s forecasted turnaround in trend against the euro also looks to have taken a step back. So the question now is just how long will this hangover last?

Duncan Higgins

Senior Analyst – Caxton FX
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‘Hard road leads to a better future’

Just one of the chancellor’s quotes from today’s government spending review. The market seems to believe it does lead to a brighter future as sterling remains within range of where it was before George Osborne opened his mouth.

Despite the pound’s seesaw journey during this afternoon’s session in parliament, it has come out relatively unscathed. This either suggests that the market believes in what the government had to say, or, more likely, has already priced in the potential adverse affects (the other suggestion is that the review had little of any real substance!). The truth is probably somewhere in the grey middle. Most of the spending cuts had been accounted for. However, the crocodiles teeth I have been tracing for the UK currency against its peers on my screen for the past 2 hours tell a different story. If it was all priced in why was there so much volatility?

The truth is this: the next 18 months can go one of two ways. The bleakest view is for most of the west to suffer a double dip. A dire Q4 could put the UK back in recession with stubbornly high inflation and plenty of SME’s going under. It would be a long and slow road to recovery led by the east and a weak UK currency to try and boost exports.

The second scenario would be for the west to narrowly avoid recession with some economies following Japan into stagflation. The recovery would be led by the east (again), the UK’s austerity measures gain traction and market confidence grows, bringing foreign investment and inflates sterling.

Either way, we will see a series of troughs and peaks before we are out of the woods. With the government cutting costs to the tune of £81billion and a VAT hike on the horizon, the UK will be looking to private business to pull us through. The banks need to start lending again, however, with a banking levy on the cards, how likely is that?

Tom Hampton
Analyst – Caxton FX

Sterling awaits Wednesday’s MPC minutes

With the calendar quiet on the data front, sterling has fallen by more than half a percent against the US dollar to trade just above the $1.59 level and has also lost ground to the euro, dropping below €1.14.

The pound has come off last week’s eight and a half month high against the greenback on doubts about how aggressive Federal Reserve monetary easing will be. There is also a sense now that Fed easing has been priced in leading some investors to cut their bets against that the dollar will decline.

The UK currency also remains vulnerable ahead of the publication of the latest MPC minutes and the UK government’s spending review, both on Wednesday. The review could increase speculation for more quantitative easing in the UK, and the BoE minutes could see a dovish move led by Adam Posen, putting sterling under further pressure. This all lends itself to the hypothesis that GBP will still have a little way to go towards the downside before things improve.

In other news, the outperforming aussie dollar made a move to beat parity against the US currency on Friday off the back of Bernanke’s speech where he outlined the Fed’s case for more easing, but has since dropped back to 0.99.

Tom Hampton
Analyst - Caxton FX

Caxton FX comments on UK Emergency Budget

Head to Interactive Investor to listen to Duncan Higgins, senior analyst at Caxton FX, comment on George Osborne's inaugral Budget.