Business as usual with the UK Autumn Statement: 130 pages from the Treasury, a further 186 from the Office for Budget Responsibility and no material impact on the macroeconomic and investment outlook, says Simon Smith of Barclays Wealth and Investment Management Eastern region.
Measures to boost youth employment, small business formation and export finance are welcome, but their collective impact will be small. The chancellor still has little room for manoeuvre – although if growth surprises again, it may yet widen more materially in the year ahead.
In lifting its March projections for GDP growth for 2013 from 0.6% to 1.4%, the Office for Budget Responsibility is just moving into line with the shift in consensus (and our own economists’ projections). But it does confirm that the budget deficit is likely to fall more briskly – and further upward revisions might yet bring into sight the politician’s holy grail of pre-election tax cuts.
Economists may be suffering from a collective lack of imagination. It is very clear what might go wrong, but there are upside risks to growth too, even after the upgrades. The official projections of unemployment look particularly cautious. Employment data have been telling a different story to the GD numbers for some time. If confidence picks up, falling savings ratios can boost private spending even as incomes continue to languish; and monetary policy, of course, is much looser than fiscal policy, and offers further support. Working away in the background is ongoing productivity and technological innovation – growth is the norm, remember, not the exception.
A falling deficit might tempt some investors to view gilts more positively: creditworthiness is getting a cyclical lift, and issuance will be smaller. We’d resist the temptation. Growth will eventually bring a rebound in interest rates and this is probably not fully priced in to the market. Instead, as in most regions, we advise strategically favouring stocks over bonds. The FTSE is not our favourite market, but can still offer better risk-adjusted returns than gilts.
The news that matters most to investor portfolios – including those in the UK – actually came from the US. Not the revised third-quarter GDP number that upstaged the UK chancellor, or the recent backward-looking employment report, but the remarkably robust forward-looking manufacturing ISM survey. This is one of the oldest and best global economic indicators, and perhaps hints that US economists are also suffering from a lack of imagination.
