There is something special about Budget Week. It isn't economics. Politics is all. With just weeks to go to the election, the Chancellor delivered his sixth budget. Growth is up, unemployment is down, inflation is lower, borrowing is lower. Even the balance of payments managed a surprisingly positive out turn in the latest figures for January. “He may be a Good Chancellor but is he lucky?”
The OBR talked of a “Roller Coaster profile” for public services spending through the next Parliament. A much sharper squeeze on real spending in 2016-17 and 2017-18 than anything seen over the past five years, followed by the biggest increase in real spending for a decade in 2019-20.
The Chancellor has been assisted by lower forecasts for inflation and debt service costs. Borrowing is set to fall from £97.5bn in 2013-14 to £90.2bn in 2014-15, £75.3bn in 2015-6, £39.4bn in 2016-7 before reaching a £5.2bn surplus in 2018-9.
The Northern Powerhouse is set to re balance the economy. The North is growing faster than the South. Living standards are higher than in May 2010. Tax cuts for all, a rising threshold lifting all votes, a penny of a pint, petrol duty frozen. It is an incredibly strong platform and budget for re-election … but can it really be so good?
Public Sector Borrowing Figures on Track …
On Friday, the borrowing figures for February were even better than expected. Public Sector Borrowing was just £6.9 billion down by £3.5 billion compared to February last year. In the first eleven months of the year, total borrowing was was £81.8 billion, a decrease of £8.8 billion compared with the same period in 2013/14. Income tax and corporation tax receipts were up significantly. The out turn for the year may be even better than the latest OBR projections suggest.
Labour Market Data … strong growth continues …
On Tuesday, the ONS released the latest labour market stats. There were nearly 31 million people in work up by 617,000 from a year earlier. There were 1.86 million unemployed down by 500,000 from a year earlier.
We have warned of the evident signs of overheating in the labour market. No more evident than in the claimant count data. In February, the claimant count fell to 791,000 down by 380,000 from the same period last year. This is now lower than pre recession levels. We will be closing the job centres in 2017, there will be no one looking for work.
The number of vacancies increased to 735,000. By the time of the May election, the number of vacancies will have increased to over 750,000. The claimant count is likely to have fallen to just 727,000. The number of vacancies will be higher than the actual claimant count by the time of the election. This is unprecedented.
Businesses are continuing to recruit but are experiencing greater difficulties in doing so. For the moment average earnings remain subdued but for how much longer. We expect the earnings outlook to be significantly different towards the end of the year.
The OBR is forecasting GDP growth of just 2.5% this year compared to consensus estimates of 2.7%. Inflation is expected to average 0.2% through the year. Earnings are expected to rise to 2.3% this year and 3.1% next. In the US, the Fed revised down there forecasts for growth in the current year to just 2.5%.
So when will rates rise? ...
Markets still believe the Fed will begin to increase rates later this year. Q3 now the favourite following the growth revisions for 2015. Forward indications suggest US rates will hit 2.0% by the end of 2016 down from a previous 2.5% expected level.
In the UK, we expect growth of 2.5% to 2.9% this year. The labour market is tightening, recruitment difficulties are increasing, wage rates and settlements are set to rise. The inflation outlook will be materially different towards the end of the year. Once the Fed makes a move, the MPC will surely follow within the year …. It really is time to leave Planet ZIRP.
So what happened to Sterling this week?
Sterling closed up against the Dollar at $1.495 from $1.475 and moved down against the Euro to €1.3824 from €1.401. The Euro closed up against the Dollar at €1.0815 from €1.052. The push to parity postponed for now.
Oil Price Brent Crude closed unchanged at $55.32 from $55.68 US oil stocks are rising putting pressure on prices. The average price in March last year was $107.48.
Markets, moved higher. The Dow closed at 18,127 from 17,691 and the FTSE closed up at 7,022 from 6,740.
UK Ten year gilt yields moved down to 1.52 from 1.72. US Treasury yields moved down to 1.93 from 2.12.
Gold closed down at $1,182 ($1,152).
That’s all for this week. Don’t miss the Big Social Media Conference in July and the Great Manchester Economics Conference in October. It’s a great line up for all events!
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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.