Hammond unveils tools to combat Brexit cost
Apart from the odd joke at the beginning and the end of his statement, it’s now clear that Hammond will be a relatively sober and matter-of-fact chancellor. He rapidly whipped through the OBR’s weaker growth and tax revenue forecasts, placing the blame on the uncertainty that’s to follow our decision to leave the EU – a referendum that’s now forecast to cost the economy 2.4% in potential growth (that’s over £11bln per year).
Hammond’s statement was thick with positivity, but thin on hard-hitting policy changes. We do not anticipate that the highly advertised adjustments in the tax-free personal income allowance, banning of lettings agent fees and fuel duties will have any material impact on consumer spending and aggregate demand in the face of quickened cost-push inflation. As such, the Chancellor must follow today’s performance with further material changes to corporation tax to retain foreign investment and bolster the UK economy in 2017 and beyond.
Productivity puzzle yet to be solved
While Hammond’s promises to lift infrastructure spending to 1.2% of GDP in 2020 from today’s levels of 0.8% seem impressive, a lack of clarity on just where these funds will be going should trouble many. This, compounded by the new steeper borrowing estimates mean that if these funds are not spent wisely, we could see a further deterioration in UK productivity measures, rather than an improvement.
The pound benefited from the Autumn Statement, rising close to a cent against the euro and hitting a two-month high. The statement’s promise of measures to tackle low domestic investment were enough to lure many into buying the pound – but further clarity and details will be needed for GBP/EUR to maintain these gains.
Market thinks rate hike’s in the bag after FOMC minutes
The latest dollar surge followed the Fed’s minutes from their latest meeting, where many Fed members saw a stronger case for policy tightening given the ongoing strength in domestic labour markets, with some members stating that a rate hike should take place on December 14th. The dollar now sits at the strongest level on a trade-weighted basis for over a decade – the last time the dollar was this strong – 50 Cent’s In Da Club was number one in the charts.
This move will certainly hurt US exporters and push up costs for the rest of the world importing American’s goods, further evidence that overseas markets including the UK and Europe could be facing a wave of inflation in the early month of 2017.
The calendar is relatively light today and liquidity and volumes will likely be thin given the Thanksgiving holiday.