Autumn Statement Preview

Rarely has there been such an important Autumn Statement. Tomorrow Chancellor of the Exchequer Philip Hammond will unveil the first official overview of the UK’s economy and outline his spending and tax priorities. Previous statements have been non-events with a few fiddles and gimmicks, but this year Hammond has the chance for a post Brexit fiscal reset and; this year more than most investors are all ears.

Up until now economic data has proved to be resilient in the immediate aftermath of the Brexit vote showing the UK to be in a better place economically than had originally been forecast in the case of Brexit. However, indicators are pointing to clouds gathering on the horizon with a period of low economic growth, increasing inflation and weaker tax revenue pencilled in for next year, meaning Hammonds hand will be restricted as he attempts to balance influencing factors from several angles.

JAMS

One of the key influences will be Theresa May’s desire to go for the Just About Managing group of society or JAMS. This is a strategical move by the current Prime Minister in attempt to gain the support of those previous Liberal Democrat or central Labour voters who no longer feel affiliated with their party. Regardless of Hammonds own plans, he would be a brave man to ignore her wishes to go after this group in society.

Move away from Osbornomics?

Much of the debate so far has centred around how far Hammond will stray from his predecessor’s austerity measures and plans to balance the books by 2020. Given the change in landscape there is almost no doubt that the priority of balancing the books has been pushed further down the list but that by no way means that it will instead be a Trump-style spending spree.  Most recent rhetoric from Hammond himself has been of a more cautious fiscal conservative, a divergence from the expansionary desires of Theresa May.

We are still expecting to see a fiscal rest, one that does focus more on spending but assumptions that Hammond has a free rein are mis-placed given the fact that’s to a large degree his hands are tied by the poor borrowing data and the weak expected economic outlook, in addition to the reported £100 billion black hole in its finances which the UK is allegedly facing due to the vote to leave the European Union.

More borrowing

In order to shore up the economy the government is expected to increase its borrowing, with upward revisions to net borrowing figures ranging from £8 billion to an extra £18 billion for 2017-18, taking the total to somewhere in the region of £63.5 billion – £73.5 billion. Should this amount be added to gilt issuance it would represent a significant increase which we would then expect to increase the UK’s rate at which it borrows. Therefore, any significantly large increase in future borrowing tomorrow from Hammond in his Autumn Statement, is likely to send the yields higher.

Yields have been very much in focus over recent week’s especially since Trump won the Whitehouse and kicked off a rout in the bond market. Investors are looking towards a future of higher inflation on both sides of the Atlantic and specifically here in the UK, a reduction in central bank stimulus. As a result yields are increasing as investors are selling out of fixed rate paying assets.

The pound

In no uncertain terms, the pound has suffered heavily as the hands of investors since Brexit. Yet with the ruling from the High Court that parliament will need to be involved in the triggering of Article 50; in addition to a more business friendly tone from Theresa May at the CBI conference where she highlighted the importance of a transitional trading arrangement post Brexit (almost pointing towards a soft Brexit) sterling surged to 1.2510, before pulling back to current levels of 1.2485.

The Autumn Statement may well provide some volatility for sterling as it could give a bit more of an indication as to whether we are looking towards a soft Brexit or a Hard Brexit; the public and investors alike will look at the Autumn Statement provide a picture of what is yet to come. Hammond will need to set the tone for a strategy going forward and this in itself could start painting a picture as to soft or hard Brexit. So it will not be the mini budget that moves sterling, but more what the implications are for Brexit and whether the government appears to be pointing towards a soft or hard angle.

Economic credibility is key. The government needs to be seen to be in control of a situation which is actually brimming with unknowns.