Economic Insights – November 2018

Phil Shaw, Investec Group Economist

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This week’s Budget gave us all some relief from Brexit related issues, and with it an opportunity to focus on the performance of the economy. In brief, this shows that economic momentum was maintained during the summer, as the heatwave helped the economy to catch up from the hit from the snow at the start of the year.

Inflation is a little above the 2% target. But what is more eye catching is that the unemployment rate stands at 4.0%, a joint low since 1975. This combination is in itself likely to prompt the Bank of England to raise rates again, as the BoE pre-empts upward pressure on wage growth.

Moreover the Budget will add to these pressures. Better than expected outturns on the budget deficit recently have prompted Philip Hammond to embark on a major giveaway. As expected, most of this is directed towards the NHS, but the Chancellor also shared his largesse around a number of other groups.  In aggregate, the net fiscal stimulus is in excess of £30bn in five years’ time and we should begin to hear if and how the BoE may plan to respond.

In terms of the motor industry specifically, current numbers on car registrations and production are very volatile. This is connected with new emissions standards (WLTP and RDE) which have led to a rush of ‘old’ vehicles being sold off in August and some delays to production of cars conforming to the new standards. Car markets all over Europe are being affected by these rules, not just the UK.

In short, we would be very wary of media headlines claiming that demand for cars is either collapsing or booming.

 

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Budget Highlights

  • Growth forecasts revised up, improving next year from the 1.3% forecast in the Spring Statement to 1.6%. In 2020 Philip Hammond expects growth of 1.4%, 1.5% in 2021 and 22 and 1.6% in 2023
  • The Chancellor announced that with “regular pay growth at 3.1%, its strongest in almost a decade and inflation forecast to average 2% next year, the OBR [Office for Budget Responsibility] is forecasting sustained real wage growth in each of the next five years”
  • Budget deficit forecast for 2018/19 fiscal year cut to £25.5bn from £37.1bn forecast in March
  • Duties: Fuel, beer, cider, spirits tax frozen
  • Extra £420m promised to repair potholes
  • Additional £500m set aside to prepare for a no-deal Brexit
  • Confirms an extra £20.5bn (in real terms) for the NHS over the next five years
  • Personal allowances and higher rate threshold raised creating a tax cut for 32 million people; 2020 personal tax allowance target of £12,500 and higher rate of £50,000k brought forward to 2019
  • An additional £1bn to be injected into universal credit transition over five years and £1.7bn increase in UC payments
  • The Chancellor promised to help small shops by cutting business rates by a third for all retailers in England with a rateable value of £51,000 or less – a saving of “up to £8,000 for up to 90% of all independent shops, pubs, restaurants and cafes”.

View our key economic data-summary

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