The Chancellor of the Exchequer, Philip Hammond, was fairly true to his word in delivering something of a non-event in his Spring Statement. Under the ‘new’ format (which has been used several times before), the Chancellor will now only have one annual Budget Report complete with the hotly anticipated tax and spending changes, leaving the Spring Statement as little more than a short update.
The latest update from the independent Office for Budget Responsibility (OBR) provided relatively little scope for optimism, despite the best efforts of the Chancellor. GDP growth for 2018 was revised up relative to the forecasts from November, by 0.1% to 1.5%, but the official outlook remains much more subdued than was the case this time last year.
The Chancellor’s rallying cry that “forecasts are there to be beaten” fell somewhat flat, particularly as real wages (and by extension, living standards) remain negative, only turning positive in the first quarter of the new fiscal year – a result of falling inflation more than rising nominal wage growth.
Source: OBR, actual data for 2017 in Spring 2018 series.
Perhaps because of this, the OBR’s GDP forecast assumes very little from the consumer for the next few years with business and government investment expected to be the main drivers. A positive global economic backdrop no doubt helps the UK, but even the upgraded figure is some way behind the rest of the pack, with Real GDP for the G8 expected at 2.3%.
The update also reinforced the view that UK productivity remains weak, with further downgrades suggesting challenges for workers and businesses in the UK.
The latest update from the Chancellor and the OBR remains consistent with our view that there are structural challenges for the UK economy in the near term, with ongoing political uncertainty holding back growth potential.
The better news is that these headwinds will likely translate to tailwinds down the line in the form of pent up demand, and market valuations are reflecting the weak sentiment. At some point, these two factors will likely create an attractive investment case, but we don’t believe we are there yet.
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