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Autumn statement is short on excitement


Richard Carter, Fixed Interest Specialist at Quilter Cheviot, comments on Chancellor Philip Hammond’s first – and last – Autumn Statement…

Philip Hammond is not the most exciting of politicians and this was not the most exciting of Autumn Statements. However, the Chancellor’s speech did include some very sensible measures designed to boost the UK’s long-term economic growth rate, in part through the creation of a new National Productivity Investment Fund. There was also further spending announced on housing, as well as more efforts to tackle tax avoidance and also a smidgen of good news for savers.
For the markets, though, the main focus was always going to be the impact of Brexit on the growth and borrowing forecasts and they were actually quite shocking. The Office of Budget Responsibility (OBR) calculated that potential growth will be 2.4 per cent lower over the next few years because of Brexit, with next year’s forecast cut from 2.2 per cent to 1.4 per cent.
The government will also have to borrow an extra GBP122bn between now and 2020-21 and, instead of the intended surplus, there will now be a fiscal deficit of over GBP20bn by the end of this parliament.  Not surprisingly, gilt markets have not reacted very kindly to this news, especially as lenders will be asked to stump up an additional GBP15bn in this fiscal year alone. Bond markets have been struggling recently amid fears over rising inflation and the possible impact of Trump’s victory in the US, and this news doesn’t help.
Of course, if there is one thing that you can rely on, it is that economists’ forecasts are seldom right in the long-run, so this may turn out to be an overly pessimistic outlook from the OBR.  So far, the UK economy has confounded the sceptics and proved to be remarkably resilient despite the Brexit uncertainty – perhaps this will continue. To be fair, the Chancellor also remains committed to bringing down the deficit substantially by the end of this parliament and investors are likely to welcome the efforts to boost productivity in the UK.
In terms of selected measures:
• GBP23bn National Productivity Investment Fund used to invest in infrastructure and innovation. GBP2.3bn Housing Infrastructure Fund also announced and more money for affordable housing.

• Letting agents’ fees to be abolished, insurance premium tax raised, employee tax breaks curbed.

• A new government-backed savings bond with a 2.2 per cent interest rate over three years, but capped at GBP3000.

• No more Autumn Statements! The main annual budget will now take place in the autumn with a Spring Statement from 2018 which will not be a ‘major fiscal event’.

In summary, this was a fairly predictable Autumn Statement from Philip Hammond, but the efforts to improve productivity and the infrastructure of the UK are very necessary and to be welcomed. The key going forward will be what impact the Brexit process has on the economy, especially once the negotiations begin in earnest after the triggering of Article 50. In truth, investors are unlikely to spend too much time dwelling on the detail of the Autumn Statement because there are a number of key political events on the horizon, including the start of the Trump Presidency, the Italian referendum and the French Presidential elections. There is also likely to be an interest rate hike in the US next month, with potentially more in the pipeline next year. At Quilter Cheviot, we will be keeping a close eye on all of these issues as we look to deliver the best investment outcomes for our clients.

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