Harry Potter and The Office for Budget Responsibility

Budget week and the Chancellor outlined a budget for the next generation of Prime Ministers. Matthew Parris writing in the Times today is not so sure George Osborne will be one of them.

Osborne may struggle to be the next Prime Minister, particularly from the job next door, he writes today. Time for a change in number eleven perhaps? I doubt that.

The budget had a mixed reaction especially with the cuts to disability payments. The PR photo shots of the Chancellor in school the following day didn't look so good. The Treasury Boss looked as out of place and nervous as a new boy in the wrong school uniform on his first day in class.

Beware the IDS of March …
Iain Duncan Smith resigned on Friday. The latest attack on welfare benefits a step too far. All in this together? Not really, the Brexit boys are moving in to position before the referendum. The Prime Minister was puzzled and disappointed. The proposed changes to personal Independent payments and other disability cuts were to be kicked into the long grass.

After all, who needs a back bench revolt on welfare and an EU schism at the same time. The ideas had emerged from Works and Pensions in any case. Treasury were just doing the adding up! No reason to cut and run. Man up ad take the hit for the team! We are all in it together after all.

Of Budgets, Magic and Mystery …
Another budget and another forecast from the Office for Budget Responsibility. Always exciting. It’s like a new chapter in a Harry Potter novel. We never know what mystery and magic will emerge from the text.

So it proved. The OBR had been so optimistic in November forecasting growth of 2.4% this year and an average growth of 2.4% over the next five years. Nominal GDP was set to increase by 4.4% in each year. By 2021, the economy would be worth almost £2.4 trillion.

Economists are subject to mood swings. The OBR is no exception. In March, the growth forecasts have been revised down to 2.1% real growth and four percent nominal growth. Growth in the current year has been revised down to 2%. By the end of the forecast period, the economy will be worth just £2.3 trillion. Over the period, the Chancellor will have lost some £100 billion of revenues.

Why is the OBR so gloomy? Employment is increasing, wages are rising, interest rates are on hold. Business confidence remains high despite some short term concerns about Brexit.

It’s a mystery why the OBR have become so pessimistic about growth in just a few months. It’s a miracle that despite the lower growth forecasts, the Chancellor will still produce a budget surplus of £10 billion by 2020 despite the revenue loss.  

The real surprise, the OBR expect borrowing in the current year to be just £72 billion, when the January number suggest £80 billion would be the likely out turn. Soon all will be revealed but not necessarily by the  year end the warning ... strange that.

Worries about productivity abound?
The OBR is worried about productivity in the UK economy. Things were improving in the first three quarters of 2015. Q4 was a setback. The Q4 level is now taken as the new norm(al) over the next five years. Why so pessimistic? The OBR think that “productivity is a driver of growth in the economy”. It isn’t. Productivity is the measure of growth in the economy. It is just an output statistic. Output divided by labour equals productivity. The is no Harry Potter magic productivity dust.

Factor inputs, like labour, business Investment, infrastructure investment, education, training, apprenticeships, they are the real drivers of growth in productivity. In the UK, there is no constraint to labour or capital inputs. The labour pool is growing as the immigration stats confirm.

Productivity may slow as the service sector dominates growth. Charlie Bean’s review of the national statistics, suggest significant parts of the economy are excluded from the ONS GDP stats in any case. The high added value, high productivity creative digital sector may is significantly under recorded. Later adjustments may suggest productivity is not as bad as is currently outlined.

So what of he future? We shall await the next chapter in the OBR series with interest. What magic and mystery will emerge in the next release. What spells will be cast. What  mood of the cast.

So what of rates …
The Fed made a dovish statement about rates this week. Two rather than four rate rises are now envisaged this year. The blue dots have been pushed lower in the forward projections. The Dollar softened against the Euro and Sterling as a result.

In the UK, at its meeting ending on 16 March 2016, the MPC voted unanimously to maintain Bank Rate at 0.5%. The Committee also voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion.

All MPC members agreed that when Bank Rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles.  This guidance is an expectation, not a promise. The actual path Bank Rate will follow over the next few years will depend on the economic circumstances.

We still expect UK rates to rise in the third quarter this year as inflation accelerates in the third quarter 2016  and commodity prices rally. The MPC will be obliged to follow the Fed …

So what happened to Sterling?
Sterling closed up against the Dollar at $1.449 from $1.439 and down against the Euro at €1.285 from €1.289. The Euro moved up against the Dollar to €1.127 from €1.116.

Oil Price Brent Crude closed at $41.206 from $40.36 The average price in March last year was $59.58. The deflationary impact continues but will begin to unwind later this year.

Markets, rallied - The Dow closed at 17,554 from 17,205. The FTSE closed at 6,189 from 6,139.

Gilts - yields moved up and down. UK Ten year gilt yields were up at 1.449 from 1.439. US Treasury yields moved down to 1.87 from 1.95.

Gold closed at $1,251 ($1,260). The old relic slips further.

That's all for this week. Don't miss Our What the Papers Say, morning review! Follow @jkaonline or download The Saturday Economist App! Our review of the Brexit facts and figures out soon!

John

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