There is some understandable apprehension ahead of this year’s UK Autumn Statement, which is like a half-way point in the budget. The prelude to last year’s was an unmitigated disaster, seeing the pound collapse, the resignation of the Chancellor and presaging the beginning of the end for the shortest PM term ever.
The current Chancellor of the Exchequer, Jeremy Hunt was brought in to smooth things over, and help the markets overcome the shock of offering tax cuts with no way to finance the spending. As a much more predictable policy setter, investors are likely not expecting any major changes in the Statement. But, the scope of what is brought forward inevitably will likely affect the currency, and that’s where the interest of Forex traders lies.
What Should We Care About
The Statement contains a summary of spending and planned taxes for the rest of the year. This is an instrumental barometer for the economy. Alongside the Statement, the Office for Budget Responsibility will update its forecasts for GDP growth for the UK. This provides a reassessment point for how monetary policy is going, and could guide potential changes.
The BOE is particularly sensitive to economic growth at this point, with inflation coming down, if not as fast as policymakers would like. A slowing economy would contribute to slower inflation, according to the most commonly accepted theory. And the BOE would like to be on the side supporting economic growth. So, the worse the economy is expected to be, the more likely the BOE to ease up on the tightening.
What Forecasts are Key
The assessment of the BOE and the UK government has been that the country will narrowly avoid a recession. By narrowly, apparently, they mean that growth will essentially stagnate for at least a year. Stagnation, with inflation coming down, is something the BOE has shown to be willing to accept.
But, if the forecasts were to switch to show a negative growth outlook, then it might shift the BOE’s position towards more dovishness. On the other hand, a less likely possibility is that growth projections are revised higher, which would contribute to speculation that the BOE might be serious about another rate hike. After all, if the economy is growing, it provides upward pressure on prices and gives the BOE more room to tighten.
Keeping to the Trend
The ghin is, the OBR updates its outlook each quarter, and each time has cut the long-term outlook. Some of the adjustments allowed for some short-term growth that would not last through 2024. In its latest assessment, the OBR predicted the economy would be essentially flat until 2026. So, any upgrade to the growth forecast would be a change in trend.
The other thing is that the Autumn statement includes announcements on spending, which typically is seen as supporting economic growth. The government has been under increased pressure to improve services, such as the NHS. The positive growth that increased spending might have, however, could be offset if the proposal includes new taxes to fund it.
