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UK in focus: Autumn Statement

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The UK Chancellor was able to announce lower borrowing, more headroom against targets, and GBP20bn of tax cuts but the margin against targets is still thin, even with assumed spending cuts and the highest tax burden since 1948. From a Bank of England perspective, the biggest news may be the 10% rise in the National Living Wage.

UK data review (Sep/Oct 2023)

  • GDP growth was slightly ahead of consensus in both September (+0.2% m-om) and Q3 (flat on the quarter). By industry, services output rose 0.2% m-o-m in September, industrial production was flat and construction activity was up 0.4%. This suggests fairly decent momentum going into Q4 and that a negative quarterly print can be avoided there, too. In other words, we think that the UK should avoid recession. But of course, zero quarterly growth is hardly much to get excited about, and weakness in domestic demand reamins a concern.
  • Pay growth edged down from 8.2% to 7.9% in the third quarter versus the same period last year, well ahead of consensus which had expected a drop to 7.3%. The upside surprise appears to have been driven by stronger-than-expected bonus payments which, in the private sector, were up over 27% y-o-y in September, with strength concentrated in non-financial services. Excluding bonuses, whole economy pay growth edged down from 7.7%, still growing at a rate which is well above levels consistent with hitting 2% inflation.
  • Total employment rose by +54,000 in the three months to September (consensus -198,000), while the unemployment rate was steady at 4.2% (consensus 4.3%). As has been the case since last month, the Office of National Statistics is producing its ‘experimental’ data while statisticians improve the underlying methodology, but that nothwithstanding, employment appears to have grown over the past couple of months and the jobless rate has held steady.
  • CPI inflation dropped from 6.7% to 4.6% y-o-y in October – a slightly bigger decline than expected by consensus (4.7%) and the lowest reading since October 2021. The decline was broad-based but by far the biggest drag was utility price inflation – mostly the dropping out of sharp rises in bills last October. The core CPI rate also fell, from 6.1% to 5.7% y-o-y, as services inflation edged down from 6.9% to 6.6% and goods inflation dropped from 4.7% to 4.3%.
  • PMIs recovered a little in November, amid falling inflation and a perception that interest rates have now peaked. The manufacturing print rose to 46.7 from 44.8 (consensus: 45.0), while the services reading rose (marginally) back into growth territory, at 50.5, up from 49.5 (consensus: 49.5).

UK Autumn Statement: Spent

In the end, the Autumn Statement was an easier ride for the Chancellor than it might have been just a few weeks ago. Thanks to an extraordinary revenue windfall he was able to announce lower borrowing, double the previous headroom against his targets, and GBP20bn of giveaways – notably cuts to National Insurance Contributions (NICS) and the permanent extension of full expensing on business investment.

That was due to a helpful set of revisions from the Office for Budget Responsibility (OBR) in the pre-measures forecasts. Had the Chancellor not announced any policy changes, the forecast would have been for GBP70bn of extra revenues by 2028/29, and a deficit down to just 0.5% of GDP.

What a windfall

The Chancellor did end up choosing to spend it. But the market reaction was very far from the one seen in the September 2022 ‘mini budget’. Not only was the loosening ‘paid for’ by the additional revenues, but the OBR says that the measures in the Budget will eventually be disinflationary – by raising the supply side of the economy through higher labour force participation and business investment.

Even to the extent that’s true, the Bank of England (BoE) may be a little concerned about the impact of the c10% rise in the National Living Wage for April 2024, especially given the tax cuts, benefit rises, and political cycle (which might mean even more loosening in the spring).

Beyond the near term, it may not be as rosy a picture as it seems. There remain ‘fiscal fictions’ embedded in the OBR’s forecasts, including huge real-terms cuts to unprotected departmental spending. And the tax burden is still set to rise to its highest level since 1948. This leaves whoever is in government next with some tough decisions.

Some media reports (Sky News) have suggested that the Conservatives might want to follow the employee NICS tax cuts, which take effect in January, with an early election, say, in May. That would certainly spice things up – but as the cuts offset only a fraction of the rise in the cost of living and taxation in the last couple of years, we are not sure they are going to be an electoral game changer, any more than a growth or inflation game changer.

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