Finance Minister Jeremy Hunt offered no surprises in his latest statement, cutting national insurance, which is paid by workers, by two percentage points.
But the UK’s soaring government debt and lacklustre economic performance left little room for further adjustments, meaning that households are still battling with the pressure of high taxes, food prices, and general expenses, which weighs on prospects for economic growth.
Hunt will have been happy to avoid the turmoil that his predecessor caused in September 2022 when unfunded tax cuts caused the bond market to crumble and pushed the pound to a record low against the US dollar. The calmness in markets after his budget was unveiled had more to do with the fact that he stayed on script and delivered only what he could promise, and less to do with the markets perceiving the measures themselves as a major aid to growth in the UK, but it’s still a win.
The thing is, that with a general election later in the year, politicians are likely to try and use any opportunity they can to sway voters their way. But frankly, Hunt’s hands were tied with the budget, as the UK has had several warnings from the IMF about the state of its finances.
Do markets seem pleased with the spring budget? Yes. But will that be enough to convince voters to give the conservatives another term? Likely not. Just because Hunt kept the volatility in markets down to a minimum doesn’t mean that people are happy with the state of the economy.
Quite frankly, the situation is very dire, more than it has been in the last decade, but markets seem to be happy if politicians just stay out of the way and don’t make things worse.
So the fact that the few measures unveiled have done little to derail the Bank of England's monetary policy course has clearly helped. Lowering inflation continues to be one of the central bank’s key targets. Some feared that ambitious tax cuts from the government in a bid to attract voting power in the upcoming elections could put further pressure on the BoE’s ability to lower consumer prices to the 2% target.
That doesn’t seem to be the case, and while the BoE continues to be seen as the most hawkish and the least likely to cut in the first half of 2024, markets are still expecting up to 60 basis points of cuts from the bank this year.
Jeremy Hunt also pointed out that the OBR revised its growth forecast for 2024 from 0.7% in its November forecast, to 0.8%. This is a slight improvement from 2023, which saw a growth rate of 0.3% over the whole year and a technical recession in the final half of the year. The OBR then expects growth of 1.9% in 2025, revised up from 1.4% in its November forecast.
The upward revisions in growth data are positive and a source of optimism in markets, but that doesn’t change the fact that the UK economy is weak, households continue to struggle and prices of goods and services continue to rise, even if at a slower pace.
The month of March is going to be a very busy one on the macroeconomic calendar. The UK will get a glimpse as to how growth has kicked off the year with the January GDP reading due on Wednesday the 13th. Inflation reading will be the focus in the following week, with the culmination coming the day after, Thursday March 21st, when the Bank of England will deliver its update policy.
There are no changes expected, with the first rate cut currently priced in for August, later than the ECB and the Fed, which are both expected to come in June.
But just like Hunt, BoE Governor Bailey also has his hands tied. He was perceived to be stubborn with delivering rate hikes during the tightening cycle in 2022 and 2023, which allowed inflation in the UK to get way out of hand, peaking higher than in other developed economies.
The cost-of-living crisis put pressure on households and businesses which caused growth to drop significantly, leading to a technical recession, defined as two or more consecutive quarters of negative growth, in the second half of 2023.
Even now, growth in consumer prices in the UK is higher than in the Eurozone and the United States. In January, prices in the UK were 4% higher than at the same time last year,
versus 2.8% and 3.1% in the Eurozone and United States respectively. Moreover, both regions have also avoided recessions, with the US managing to grow over 3% in both Q3 and Q4. This means the pressure is on for the Bank of England as it has less margin to operate, and it needs to get it right this time.
So, all in all, Hunt’s budget is not seen to provide a material impact on the UK economy, but it has also avoided getting in the way of the Bank of England’s plans, which markets are grateful for. The next few months are going to be tough for the UK economy, both economically and politically, so the BoE and politicians are likely to keep a close eye on each other, making sure they don’t get in each other's way.
Daniela is a senior market analyst at Capital.com
The opinions are those of the author; not necessarily that of Capital.com or any of its affiliates.
