The OBR’s March forecasts suggest tax cuts equal to 1.0% of GDP are permissible under the fiscal rules.
But since then, the Treasury’s borrowing costs have risen, reducing scope for tax cuts to 0.7% of GDP.
The Tories will be reluctant to ditch the rules, as this would inhibit their ability to criticise Labour’s plans.
Samuel Tombs (UK Economist)U.K.
Public borrowing in April was in line with the OBR’s forecast, but expect upside surprises later this year.
Mr. Sunak likely will not opt to reduce the main rate of VAT; firms would benefit more than households.
Bringing forward April 2023’s large CPI-linked increase in benefits to October would make the most sense.
Samuel Tombs (UK Economist)U.K.
CPI inflation likely soared to 9.2% in April, from 7.0% in March, largely due to the jump in the energy price cap.
BRC data are consistent with another large rise in core goods prices, while services prices likely shot up too...
...In response to the hospitality VAT hike, big increases in phone contract prices, and an Easter boost to airfares.
Samuel Tombs (UK Economist)U.K.
Local election results imply the Tories are not on track to win in 2024, unless they turn the economy around.
Currently planned measures to support households in July and October are too small to move the dial.
Bringing forward April 2023's inflation-linked rise in benefits to October would be simple and well-targeted.
Samuel Tombs (UK Economist)U.K.
- The latest data suggest that GDP increased by 0.9% in Q1, despite the Omicron hit at the turn of the year...
- ...But lower health spending, an extra bank holiday and falling real incomes will weigh on the recovery in Q2.
- The MPC, therefore, likely will refrain from raising Bank Rate later this year, after a final hike to 1.00% in May.
Samuel Tombs (UK Economist)U.K.
- A recession has ensued on four of the five past times when consumers' confidence is as low as it is currently.
- The outlook for households' real disposable income is ghastly; we now expect a 2.5% y/y drop in 2022...
- ...But if employment keeps rising, people should be will- ing to draw on savings to maintain their real spending.
Samuel Tombs (UK Economist)U.K.
- We expect the OBR to revise up its "pre-measures"2022/23 public borrowing forecast by £3B to £86B...
- ...But Mr. Sunak's headroom in meeting his three-year ahead rules will not decline; inflation will ease in time.
- The Chancellor, however, will want to preserve this headroom to cut taxes just before the next election.
Samuel Tombs (UK Economist)U.K.
- We look for year-over-year growth in business investment to pick-up this year, reaching about 10% in Q4.
- Brexit and Covid uncertainty has faded, profit margins are healthy, and firms have excess cash.
- Higher oil prices will boost capex in the North Sea and in energy efficiency, but higher rates will hurt some firms.
Samuel Tombs (UK Economist)U.K.
- Rising debt interest payments explain why January's surplus was smaller than the OBR forecast.
- We expect the OBR to revise up its forecast for public borrowing in 2022/23 to about £97B, from £83B.
- Mr. Sunak still will meet his fiscal rules, but will preserve his remaining headroom until nearer the next election.
Samuel Tombs (UK Economist)U.K.
- Retail sales in January were still 0.5% below their Q4 average, despite rising by nearly 2% from December.
- Omicron weighed on sales at the start of the month, but the real income squeeze also is becoming a factor.
- Households' real spending will rise further, as savings are drawn upon, but retailers don't stand to benefit.
Samuel Tombs (UK Economist)U.K.
- Easing supply constraints and labour shortages should boost the recovery in construction in H1 2022.
- Further ahead, falling real incomes and increases in mortgage rates will dampen housebuilding activity...
- ...Even so, we expect construction output by year end to be about 1.5% above its 2019 average level.
Gabriella DickensU.K.
- Growth in the broad money supply reverted to its pre-Covid rate in Q4, despite very low interest rates.
- Households dipped into their excess savings in December to maintain their spending, not increase it.
- Mortgage refinancing will cease to boost disposable incomes in 2022; the effective rate will stabilise.
Samuel Tombs (UK Economist)U.K.
- House price growth remained strong in Q4, despite the return of the SDLT threshold to £125K at the end of Q3.
- Timely indicators, however, suggest Omicron weighed on buyer demand at the end of the year, and in January.
- Higher mortgage rates and falling real incomes will cause house price growth to decelerate this year.
Samuel Tombs (UK Economist)U.K.
- Employment has continued to rise, despite the withdrawal of the furlough scheme and the Omicron hit...
- ...But growth will slow soon; few people who want a job don't have one, while employment taxes will rise in April.
- Wage growth has cooled, despite the tight job market; real wages look set to fall sharply this year.
Samuel Tombs (UK Economist)U.K.
- The Tories now trail Labour by 10pp in the polls; a no-confidence vote in Johnson is a growing possibility.
- Markets probably would prefer a more predictable successor who had a less combative Brexit stance...
- ...But the gap between the Tories and Labour on economic policy has narrowed.
Samuel Tombs (UK Economist)U.K.
- The proportion of workers changing jobs surged in 2021 to reach its highest level in the past 20 years...
- ...But lower confidence and a sluggish housing market will drive job moves back to pre-Covid norms this year.
- Job-to-job moves also will trend down in the 2020s as the population ages, bearing down on wage growth.
Gabriella DickensU.K.
- House price growth dipped in October following the return of Stamp Duty Land Tax threshold to £125K...
- ...But that most likely is a blip; timelier indicators of house price growth have remained strong in Q4.
- We expect house price growth to stagnate in H1 2022, as mortgage rates rise and real incomes fall.
Gabriella DickensU.K.
Markets now expect the MPC to hike Bank Rate to 0.50% in February, following today's surprise hike.
Most members, however, thought the decision was "finely balanced" and see a "modest" tightening ahead.
Omicron won't just have short-term effects if the MPC hikes again and pushes firms over the edge.
Samuel Tombs and Gabriella DickensU.K.
November's 5.1% CPI inflation rate was 0.6pp above the forecast made by the MPC only last month...
...But high inflation is due to surging energy and goods prices; underlying services inflation remains subdued.
We expect the headline rate to peak at 6.0% in April, but then to fall sharply, slipping below-target in 2023.
Samuel Tombs and Gabriella DickensU.K.
The unemployment rate continued to fall in October, despite the end of the furlough scheme.
Some full-time workers have become part-timers post-furlough, but they don't seem to want more hours.
Wage growth, however, slowed to a below-inflation rate in October; the real wage squeeze will get worse.
Samuel Tombs and Gabriella DickensU.K.
