Graphic: UK budget winners and losers: the pound, gilts and stocks
15/03/2023 17:21
By Lucy Raitano and Samuel Indyk
LONDON, March 15 (Reuters) - Finance minister Jeremy
Hunt presented less gloomy forecasts for Britain's economy at
his Spring Budget on Wednesday.
Upgraded official forecasts showed Britain, the only one of
the G7 group of large economies not to recover to its
pre-pandemic size, would now avoid a recession this year.
"International investors will be constructive around the
type of budget we've had today, which suggests a calmer approach
to managing the UK," said Edward Park, chief investment officer
at Brooks Macdonald in London.
ROSIER OUTLOOK
A rout in global banking stocks on Wednesday
overshadowed many UK-specific moves. But some analysts tipped a
medium-term boost for gilts and sterling, as Hunt's Budget
returned a sense of fiscal conservatism that was lost last
September when former prime minister Liz Truss' presented
unfunded tax cuts in a badly received mini-Budget.
Public borrowing estimates were revised lower and Hunt also
avoided major spending sprees or big tax cuts. Some viewed the
official forecasts as too rosy.
"Unlike the OBR, we do not think the UK will escape a
recession," said Hetal Mehta, senior European economist at fund
manager Legal & General Investment Management.
INTEREST RATES
The OBR's view did not encourage traders to place bets on
more aggressive rate rises from the Bank of England.
Investments announced by Hunt such as a corporate spending
tax break, a boost for defence and extra childcare support were
not viewed as particularly inflationary.
"Most of the new measures are designed to boost the
economy's supply side," according to Pantheon Macroeconomics
chief economist Samuel Tombs, instead of stoking demand.
After Hunt's statement, money markets tilted towards the BoE
holding off from another interest rate hike at its March
meeting, putting a probability of 58% on no change. Last week,
expectation of a BoE rate pause stood at around 10%.
STERLING
Sterling rose 1.2% to its highest level against the euro
EURGBP=D3 this year, as the currency pair most closely
associated with the UK outlook reacted to the official view that
a recession will be avoided in 2023.
The pound fell 0.85% against the U.S. dollar to $1.2055,
however, GBP=D3 , as global investors dived into perceived
safe-haven assets.
"Despite the budget over-delivering in terms of spending
relative to expectations, thus prompting a positive surprise in
the OBR’s issuance plans for 2023/2024, it seems as if markets
just don’t care," said Simon Harvey, Head of FX Analysis at
Monex.
"Their main focus is on the fallout from Credit Suisse’s
demise and what this means for central bank policy".
STOCKS
Wider stock markets were trading negatively on Wednesday as
focus remained on a deepening European bank rout. The FTSE 350
.FTLC largely tracked other major indices and was last down
2.6%.
With corporation tax due to rise to 25%, there had been
concern around the end of a generous pandemic-era tax saving on
business investment known as the "super deduction".
Hunt announced a new incentive for business investment that
will allow companies to offset 100% of their capital expenditure
against profits, although that represented a scaling-back of tax
breaks under a previous scheme.
Traders attributed a post-budget uptick in BT .BT shares
to the tax break on capital expenditure. Shares in the telecom
company were last up 1.4%.
Such business-friendly moves are likely to be welcomed by
market players who in the run up to the budget highlighted the
wide valuation gap between UK and U.S. equities.
In light of Britain's support for Kyiv following Russia's
invasion of Ukraine last year, another area of focus was defence
spending, with the chancellor unveiling plans to add 11 billion
pounds to the defence budget over the next five years
According to Michael Field, European Equity Strategist
at Morningstar, the beneficiaries of increased defence spending
include the likes of BAE systems < BAES.L>, Babcock < BAB.L>,
Rolls-Royce RR.L and Serco < SRP.L>, but moves on the day were
limited, as changes to defence spending had been flagged ahead
of the budget.
Plans to extend energy bill subsidies for households is
generally seen as a positive for energy companies, Field said.
Shares in British Gas owner Centrica CNA.L tracked the
rest of the market, down 2.6%, although shares in energy
supplier SSE SSE.L fared better, losing only 0.3%.
Unlike in the last budget, noise around windfall taxes on
oil and gas companies was muted in the run-up to the budget
since energy prices have fallen dramatically since then.
"If that inflation had lasted longer, the government would
have been under pressure to take more action," said Field,
adding that plans to boost nuclear power spending would be on
energy majors' radar.
GILTS
The OBR now sees the economy contracting just 0.2% in 2023
versus previous forecast of a 1.4% contraction.
"The government is loosening policy so, all else being
equal, that means demand should be stronger and rates might rise
faster," said Martin Beck, chief economic adviser to the EY Item
Club.
"However, the measures the government has brought in are
mainly on the supply side, and to that extent should reduce
inflationary pressure."
The Debt Management Office cut its plans for gilt
issuance this year, with 241.1 billion pounds of borrowing
expected, compared to 305.1 billion in November, but still above
expectations in a Reuters poll of 232.5 billion.
"In general, the budget is not the big story for gilts right
now, global drivers are in the driving seat," said James Smith,
economist at ING.
"There's still a lot of supply for the market to absorb and
that central challenge hasn't really changed."
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UK valuation gap https://tmsnrt.rs/3yqsLMR
Real GDP growth projections https://tmsnrt.rs/3Tj32j1
UK government debt sales to surge this year https://tmsnrt.rs/3ZQJF3i
Recovery a couple of years away https://tmsnrt.rs/3l9QONj
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(Additional reporting by Naomi Rovnick and Joice Alves;
Graphics by Sumanta Sen; Editing by Amanda Cooper and Jon Boyle)
((Naomi.Rovnick@thomsonreuters.com;))