The week of the budget …
“I have never shied away from presenting difficult truths to the British people. And one difficult truth the British people must confront, is that by this time next year, I may well appear to be the most successful Chancellor in UK history.”
Well it would have been a great start to the budget speech - and yes it could well be true! Growth up, inflation down. Employment up, borrowing down, just the trade figures will continue to disappoint. Construction will be much higher. Investment and real earnings will be rising by the second half of the year. The Tories could not hope for a better economic platform to pitch at the hustings next year. The Budget 2014 simply enhanced economic prospects for the year ahead.
Proclaimed as a budget for makers, doers and savers. The savers did particularly well but above all else, it was a budget for voters. The Chancellor offered a prudent budget with fiscal constraint and an obvious eye on the electorate. “Fixing the roof whilst the sun is shining” the mantra. It is clear the Bullingdon boys are fixing the roof in Downing Street, intent on a prolonged stay beyond May 2015.
For a more comprehensive note on the budget itself, check out the full post here. It was a budget which 24 hours later was considered (by the IFS and others) to be more expansionary than at first thought. It was a clever budget. Hard to think it came from the same stable as the "omni shambles" just two years ago.
The polls have Labour just 3 to 4 points ahead of the Conservatives. Tory analysts will have an eye on the 1986 rally. A fifteen point swing in just twelve months, to enable the Thatcher administration to stay in power. The Lib Dem vote has collapsed, the UKIP vote will evaporate. The Chancellor has created a winning platform. It will be difficult, but not impossible, for Prime Minister Cameron to slip from the podium.
The borrowing figures for February were released on Friday. At first sight the figures appear disappointing. Borrowing in the month was £9.3 billion, slightly up from £9.2 billion in the prior year. Heading in the wrong direction? Not really. The prior year figures were enhanced by the £2.3 billion sale of 4G licences.
For the year as a whole the OBR projections assume borrowing of around £108 billion in the year down from £115 billion last year.
Over the next four years, assuming the budget forecasts for spending are achieved, borrowing could be eliminated within four years. Entirely plausible. Then the real task of reducing the £1.5 trillion debt can begin.
The good news on employment continued with further news this week. The claimant count fell by almost 35,000 in February to a rate of 3.5%. Over the last twelve months the count has fallen by 360,000 to a level of 1.175 million. Over the last three months, the count has fallen by 100,000.
On current trends, assuming growth of around 2.7% in the year, the unemployment level could fall below 1 million by the end of the year, hitting the critical 2.5% rate by the middle of next year. Why so critical? This would be the best performance since the beginning of 2008. A 2.5% claimant count rate is consistent with earnings of 4% - 5%. Far more than current achievements of 1.5%.
“Spare capacity” could become a scarce resource, sooner than we think. Base rates are set to rise in the first half of next year. The rate rise could be sooner and thereafter faster than we are currently led to believe.
Rate rise USA …
Janet Yellen as the new head of the Fed gave a clear indication, US tapering will continue with a possible elimination of the whole QE programme by the Fall. Thereafter Yellen made clear, US rate rises are likely to follow within six months.
Watch the UK and add six months, our mantra modified to perhaps three months, the guideline last week. On current job trends, we caution, watch the US and don’t blink. The UK rate rise - much sooner than you think.
So what happened to sterling?
The pound closed at $1.649 from $1.662 and at 1.1956 from 1.196 against the Euro. The dollar closed at 1.379 from 1.390 against the euro and 102.27 from 101.31 against the Yen.
Oil Price Brent Crude closed at $107.37 from $108.34. The average price in March last year was $108.
Markets, the Dow closed at 16,410 from 16,107 and the FTSE closed at 6,557 from 6,527.
UK Ten year gilt yields closed at 2.76 from 2.67 and US Treasury yields closed at 277 from 2.65. Gold loves a crisis, the crisis is over as the metal moved lower to $1,3358 from $1,378.
That’s all for this week. No Sunday Times and Croissants tomorrow. All records of the tennis results - recorded - then destroyed.
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The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.