So, while the popular narrative has it that the initial forecasts were way off, the 27-month forecast was actually spot on; the economy just took a different route.
At the time, we thought other forecasters’ initial estimates were too pessimistic but the first 12 months beat even our expectations, largely because households unexpectedly decreased their rate of saving.
Key Points
- The outlook for the UK economy remains unchanged, with low growth and tight fiscal policy ahead.
- The new "tech tax" could be seen as correcting for a market distortion.
- The Chancellor has maintained some fiscal headroom in preparation for Brexit.
The size of the UK’s trade in services relative to its economy is bigger than any other large advanced economy’s. Its manufacturing is one of the most specialised, involving above average use of overseas supply chains. Even if Brexit eventually turns out to be a great change of direction, the disruption to regulatory regimes and supply chains that a hard Brexit would entail over the short to medium term means that the likelihood of investment surprising to the upside is very low indeed.
So, in short, the Chancellor is wise to keep some fiscal headroom.
We believe the most likely outcome next year is a deal de minimis with the salient details still to be hammered out during an extended negotiating period. Indeed, in the past fortnight the EU and UK have reportedly considered a year’s extension to the two-year transition period, taking us to December 2021.
However, that would overlap with the start of the EU’s next seven-year budget cycle, and could leave the UK liable for a bigger ‘divorce bill’.
Economically, by preserving ‘business as usual’ for another three years, a transition extension would likely be positive for the economy. That said, it sustains the cloud of uncertainty and could potentially hold back investment decisions for longer.
The bottom line is that neither the Budget nor Brexit are globally important events, and the global revenue streams underlying most investors’ portfolios should be unmoved.
Ed Smith is head of asset allocation research at Rathbones
