Azad Zangana, European Economist at Schroders comments on today’s Budget: “With the Chancellor still facing the unenviable task of bringing down the UK’s still huge budget deficit, George Osborne had little room to manoeuvre despite calls for more help to stimulate growth. Nevertheless, the Chancellor still managed to pull a rabbit out …
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of the hat in the form of reforms to fuel excise duties, and the unexpected 1p cut in petrol duty. The scrapping of the fuel escalator and the introduction of a fair fuel stabiliser is a step in the right direction for improving stability in the medium term. However, in the short-term, the penny cut in fuel duty as oppose to the five pence rise that had previously been planned should help reduce inflation in the short-term. This in turn will give the Bank of England a little more time before it has to raise interest rates.
“Overall, there was little surprise in the economic forecast. The Office for Budgetary Responsibility (OBR) downgraded growth for 2011 from 2.1% to 1.7%, but then again, so have most economists as a result of the snow-hit fourth quarter GDP outcome. Further out, the OBR has broadly stuck to its forecast, which we think is optimistic. On inflation, the OBR raised its forecast as expected, but warned that the worsening trade off between growth and inflation will hurt tax receipts. Indeed, the total change in measures and the worse forecast means that the government will borrow a total of £43.4bn more by 2015/16 than previously forecast. “
Richard Buxton, Head of UK Equities at Schroders, comments:
“Given that the major fiscal policy announcements of the early years of this Government occurred in the post-Election Budget, this was always going to be a reasonably low impact Budget. Unsurprisingly, growth forecasts for this year were nudged down to reflect the weaker Q4 and start to the year, but expectations for 2012 and beyond have been maintained. The acceleration in the planned reduction in corporate tax rates is helpful to equities and may at the margin underpin an improvement in corporate spending, which is important to sustaining the recovery. Increased levies on banks merely add to the plethora of headwinds and uncertainties which the sector faces, but again are of limited impact against the broader issues of working towards regulatory clarity and the restoration of medium-term return on equity targets. These continue to support the investment case for the banks in our view, but it was always going to be a multi-year recovery process.
“In short, there is little in this Budget to substantially change the outlook for UK economic activity or the equity market. In the short term, the drivers will remain investors’ risk appetite in the face of the situation in the Middle East, the still live issue of the nuclear contamination threat in Japan and the ongoing Eurozone debt crisis – and EU politicians attempts to address this. Medium term, we may have to face interest rate tightening from the ECB whilst Fed policy remains loose. History suggests this is rarely an enjoyable environment for equities, so we may face some rocky moments. The path of UK rates remains unclear in the light of recent seemingly conflicting statements from UK policymakers, to add to the uncertainty. That said, one can only be impressed by the degree to which equity markets have proved resilient in the face of so much potentially worrying news, with only the shortest and sharpest of setbacks. This does support our view that, whilst there will be upsets and volatility, equities will grind usefully higher over the course of the year, despite a sluggish growth environment, as valuations and corporate profits justify further progress.”
David Scammell, Head of European & UK Interest Rate Strategies at Schroders comments:
“High inflation, high borrowing and a complacent Bank of England provide a challenging backdrop for the gilt market. Nonetheless, the market remains well supported by investors, particularly those from overseas, who seem to applaud the government’s fiscal consolidation plans. The 2011 Budget re-affirmed the austerity plans laid out last year and thus, will do little to change the overall sentiment.
“Concerns about the growth outlook have grown, thereby raising the cumulative borrowing numbers by around £35bn. However, the government looks to have overfunded in 2010-11 due to a slightly lower-than-projected cash deficit (higher tax receipts), and is still on track to achieve its new fiscal rules. These rules are ’a cyclically-adjusted current account balance by the end of the rolling, five-year forecast period’ and ’a target for public sector net debt as a percentage of GDP to be falling at a fixed date of 2015-16’. That said, the market may be inclined to infer that the government’s reliance on strong economic growth over the next few years argues for a supportive monetary policy.
Source: IFAWorld – Schroders
