The concerning aspect from the point of view on an investor in UK equities were the OBR downgrades to economic growth projections Osborne reported. In trimming growth expectations back to 2.0%, 2.2% and 2.1% for the coming three years the OBR will have sent a small but not dismissible wave of concern through investors with a large weighting to the UK in their portfolios.
This does need to be put in perspective however, and Osborne certainly was not going to neglect to point out that this level of growth still puts the UK at the head of the developed world pack.
“As usual, he managed to pull some ‘rabbits from hats’, such as on saving, over-indexing of personal allowances, and corporation tax,” commented Hermes Investment Management’s chief economist Neil Williams. “But, while helpful to longer term growth and competiveness, his measures short-term may have more micro than macro effects on the economy.”
“So, let’s not get carried away,” Williams continued. “The fiscal screw will have to stay tight if he is to hit his target of grinding down the underlying budget deficit and returning ‘to the black’ in 2019/20. First, the deficit is still high. Even including special items like bank sales, QE, and milder inflation and interest-rate assumptions, the 3.8%-of-GDP headline deficit for 2015/16 could be the G7’s widest after Japan. Second, the recovery should have squeezed the deficit more than it has. While the headline deficit falls on sustaining growth, the structural, less growth-sensitive part will fall by less, begging further reform and consolidation.”
