UK Budget: OBR expects growth to dip marginally in 2016 – BTMU

FXStreet (Barcelona) – Lee Hardman, Currency Analyst at Bank of Tokyo-Mitsubishi UFJ, shares the key points from UK’s budget, and further notes that the EU referendum and potential BoE monetary tightening pose downside risk to growth outlook for next year.

Key Quotes

“UK Chancellor Osborne unveiled the first purely Conservative budget in almost 20 years yesterday. The main economic implication was that the new government has significantly loosened the impending squeeze on public services spending which is being financed by welfare cuts, net tax increases and three years of higher government borrowing. As a result the government has delayed the expected return to a budget surplus by a year.”

“The government has proposed two new fiscal targets: i) to achieve a surplus on public sector net borrowing in 2019/20 (and then every year in normal times”) and ii) for public sector net debt to fall as a share of GDP every year up to 2019/20.”

“The OBR noted that bigger cuts in public spending in 2015/16 are likely to reduce quarterly growth in late 2015 and early 2016, and that the significant slowing in the pace of spending cuts thereafter are likely to raise quarterly growth through the rest of 2016. The acceleration in fiscal consolidation which had been planned for next year is now much less marked with the structural deficit expected to fall by 0.9% of GDP in 2015/16 and then 1.3% of GDP in 2016/17. Under the previous government’s plans the structural deficit was expected to fall more sharply by 1.8% of GDP in 2016/17 and to a lesser extent in the current fiscal year by 0.5% of GDP.”

“The OBR expects economic growth to dip only marginally next year although building uncertainty related to the EU referendum and potential BoE monetary tightening both pose downside risks to the growth outlook for next year. The OBR projects that the economy will expand by 2.4% in 2015 and 2.3% in 2016 which is roughly in line with current consensus expectations amongst private sector economists.”

“The impact from the budget on the pound is broadly neutral. At the margin it could offer some support for the pound as a slower pace of fiscal tightening now planned for next year is more supportive for economic growth and could make the BoE more comfortable to begin tightening monetary policy.”

Lee Hardman, Currency Analyst at Bank of Tokyo-Mitsubishi UFJ, shares the key points from UK’s budget, and further notes that the EU referendum and potential BoE monetary tightening pose downside risk to growth outlook for next year.

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