By Mouhammed Choukeir
Everyone agrees that the UK needs growth and we’re looking towards the Budget for inspiration. However, the budget statement began with a downward revision to the growth forecast for 2013, halving it from 1.2% to 0.6%.
Though the government presently expects growth to rebound – averaging 2.4% between 2014 and 2017 – downward revisions have been the rule over the last few years. The government is still championing austerity, an approach – putting aside for the moment its other strengths or weaknesses – that has not been able to deliver growth thus far. However, one strongly positive announcement was on infrastructure spending. Public spending cuts elsewhere will fund £2.5bn spending on infrastructure this fiscal year. The amount increases going forward, with £3bn per year for five years (from 2015 onwards).
Infrastructure spending may well prove key to helping the UK out of recession and into growth. Share prices of companies in the construction industry have already risen following the budget speech.
Besides growth, two other key metrics of concern are overall debt and the deficit. Net UK sovereign debt as a ratio of GDP is expected to grow from its current 76% to 86% in 2016/17. A declining debt-to- GDP ratio is forecast beyond that. This is a year later than earlier estimates, not meeting one of the government’s two key fiscal promises. We are concerned whether a decline will take place at all within this decade. The glaring concern is that current forecasts rest heavily on growth projections that have regularly been revised downward.
The deficit projections going forward are rosier. The government expects to borrow £114bn this year, almost 6% more than last year. However, from next year on, as per the estimates, the absolute amount borrowed will decrease each year, down to £42bn in 2018. As a share of GDP, the government has managed to bring borrowing down from 11.2% in 2009/10 to 7.4% this year. However, the deficit is not expected to be under 3% until 2017/18. This is a cause for worry, especially if growth suffers further downward revisions. Further revisions are probable given government’s history of inaccurate forecasts.
There are some things to cheer, particularly for investors. Corporation tax in the UK will come down to 20%, among the lowest of any major economy. Furthermore, stamp duty on AIM listed shares is to be abolished. We retain our view that UK equities are set to make further gains, but we are negative on prospects for sterling. We don’t believe that the performance of the stockmarket.
Mouhammed Choukeir is chief investment officer at Kleinwort Benson
Comments