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Secretary of State for Foreign and Commonwealth Affairs Philip Hammond

UK Productivity Forecasts Slashed in Autumn Budget

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Chancellor of the Exchequer, Philip Hammond, revealed in his Autumn Budget speech that the Office for Budget Responsibility (OBR) has downgraded UK growth forecasts for the next five years.

The OBR, an independent body established by the UK Government to provide economic forecasts, now expects growth of 1.5% this year, compared with the 2% forecast in the Spring Budget. This is even lower than the downgrade to 1.6% many analysts had expected ahead of the Autumn Budget.

Growth of 1.4% is now anticipated for 2018, compared with the OBR’s previous prediction of 1.6% made in March. UK economic growth is anticipated to be lower than forecast and below 2% each year until 2021.

“Regrettably our productivity performance continues to disappoint,” Hammond told the House of Commons. “The OBR has assumed at each of the last 16 fiscal events that productivity growth would return to its pre-crisis trend of about 2% a year, but it has remained stubbornly flat.

“So today they revise down the outlook for productivity growth, business investment, and GDP growth across the forecast period.”

Brexit hitting UK growth

The fallout from Brexit – the weak pound and 3% inflation – is thought to be a major factor in the UK’s sluggish growth.

“As expected, real GDP growth has slowed noticeably this year,” said the OBR in its latest report. “The fall in the pound that followed the EU referendum has pushed up consumer price inflation and squeezed households’ real incomes and spending.”

The slowdown “contrasts with a pick-up in other advanced economies” the OBR added.

“Real GDP growth averaged 0.3% a quarter in the UK in the first three quarters of 2017, down from 0.5% in the second half of 2016. In the euro area, US, Canada and Japan, quarterly growth so far this year has been stronger than in the second half of 2016 and stronger than in the UK.”

However, the UK’s borrowings are expected to fall in each of the next five years, with debt due to peak this year at £49.9bn – £8.4bn lower than forecast at the Spring Budget.

The outcome of key Brexit negotiations will still dictate much of Britain’s economic future, analysts warn.
“The shape of Brexit is still the key determinant of the medium term economic outlook, and further clarity on the UK’s new trading arrangements will be more important than anything announced in this Budget,” said Ian Kernohan, economist at Royal London Asset Management.

Further interest rate hikes less likely

The poor productivity figures mean further interest rate increases might not materialise, say investors. City analysts are widely expecting two further interest rate hikes, following the quarter of a percent increase in November.

“So far the gilt market seems unfazed by the Budget and Sterling has held up pretty well,” said Alix Stewart, fixed income fund manager at Schroders.

“The OBR’s growth forecasts have been lowered by more than the market expected and the Chancellor is being more prudent on the Budget deficit than he might have been. This is resulting in less likelihood that the Bank of England will raise interest rates much more (if at all).”

Stamp duty break for first-time buyers

The biggest giveaway was the chancellor’s axing of stamp duty, a tax on property purchases, for first time buyers on homes worth up to £300,000, or on the first £300,000 of properties worth £500,000.

In what is seen as a concession to hard-line Brexiteers in the Conservative Government, Hammond also earmarked a further £3bn for Brexit preparation over the next two years, as well as an additional £2.8bn of funding for the NHS in England.

A major £44bn programme to build 300,000 new homes each year until 2020 was also unveiled, said by Hammond to be the biggest housing project since the 1970s.

Additional measures included a hike in the personal allowance – the amount British workers earn before they pay income tax – to £11,850 from April 2018, while the threshold for higher rate tax also increases to £46,350 next year.

Hammond also increased the National Living Wage from £7.50 an hour to £7.83 next year and unveiled a £1.5bn package to deal with administrative issues resulting from the introduction of the new Universal Credit welfare scheme.

Note: The opinions expressed in this article are the author's own and do not necessarily reflect the view of Alvexo on the matter.