Budget 2012: Market & Economy.

21st March 2012

Ian Copelin, Investment Director, my wealth comments “From an economic standpoint this Budget statement was all about reassuring the global markets that the government is serious about cutting our massive budget deficit.

Although it is now expected that this fiscal year’s budget deficit will ‘only’ be £126bn, £1bn less than the government’s forecast last November, it was obvious that there was, in reality, very little that the Chancellor of the Exchequer George Osborne could do:  the UK still had a £126bn deficit!  A £1bn ‘giveaway’ would not only have a limited macroeconomic impact it would send the wrong signals to the global market and the important rating agencies (Moody’s & Fitch already have the UK on a negative outlook), given the size of the UK’s annual budget deficit (currently more than 8.3% of gross domestic product).

Although media headlines are negative, the UK’s economic growth outlook is improving and is highly likely to return to growth this quarter following the 0.2% contraction in GDP during the last quarter of 2011:  manufacturing & services data and consumer confidence have all shown improvements and with the euro crisis now receding (the impact of which on the UK has been “significant”), coupled with reassuring economic data from the US, confidence in UK plc will quickly improve, leading to investment and recruitment.  The Office for Budget Responsibility (OBR) now believes that the UK economy will grow by 0.8% (compared with 0.7% previously) and 2.0% in 2013.

This confidence and economic recovery will be helped by this Budget following the two ‘pro-growth’ announcements.  Firstly, the lifting of restrictions on Sunday opening hours for two months this summer (which will probably lead to a permanent relaxation) should boost consumer spending and increase employment in the retail sector and secondly, the £20bn National Loan Guarantee Scheme, which should help small and medium sized companies get access to cheaper borrowing.  Under the scheme the government (which given its AAA credit rating, can borrow money more cheaply than the banks) will underwrite the lending so that the banks can pass-on those lower interest rates.

From a stock market standpoint this Budget statement, like many over the last few years, has little impact (with the exception of sentiment surrounding some of the smaller North Sea oil exploration companies).  As with previous statements the FTSE-100 barely moved during Chancellor George Osborne’s speech as the market digested his statement, moving in a narrow range between 5,886 and 5,898.  However, today’s overall move on the FTSE-100 is more of a reflection of the global environment than the UK Budget statement – following yesterday’s decline on concern China’s economy was slowing, investors have today reacted favourably to a report which shows that the US housing market is stabilising.

The big mistake that many investors make is to focus solely on the UK economy and assume that the FTSE-100 will move in line with that economic outlook.  With around two-thirds of the FTSE-100’s sales coming from overseas, the linkage between the FTSE-100 and outlook for the UK economy is limited.

However, the UK gilt market has reacted positively (helped by the Debt Management Office’s expectation that gilt issuance this fiscal year will be around £167.7bn – much lower than consensus estimates of £180bn – and news that the Chancellor was considering issuing a perpetual gilt).  The benchmark 10 year gilt has seen yields fall nearly 5 basis points to 2.375%.

Overall a safe budget – and one that reflects the UK’s reliance on investor confidence.”