The Weekly Update

Last week, five months to the day since the EU referendum, Chancellor of the Exchequer Philip Hammond delivered the first Budget of the Theresa May Government; the first Autumn Statement to the Commons in light of Brexit. In brief: GDP growth forecasts lower by 0.8% and 0.4% for 2017 and 2018; planned borrowing to increase by £122bn for the next 5 years; some slender support for renters and affordable housing; some mollifying policies for the ‘just about managing’ or JAMS increasing the ‘national living wage’ and tempering some of the Universal Credit reforms; corporate tax will be cut to 17% along with a wide range of new tax reforms; and new fiscal targets of a 2% deficit with debts falling by 2020. Markets saw inflation expectations surge higher; also sterling rallied to 1.2435 during the statement but then fell to 1.2360 before the end of the statement as US data came out.

Before today, Chancellor Hammond had already referenced the UK’s ‘eye-wateringly’ high debt levels, yet today confirmed that borrowing for the next 5 years will increase a further £122bn to fill the black hole that has become apparent since the Brexit vote and increase in debt interest costs, however it will also help to fund a £23bn new ‘national productivity investment fund’ which will incrementally fund projects from transport infrastructure to high-tech innovation.

Perhaps an interesting technical oddity we noticed is the budget no longer misleadingly accounts for pseudo sterling gains from hedged foreign currency reserves when calculating the Public Sector Net Debt (PSND). Previously it had included such gains in sterling terms on the assets whilst omitting the corresponding losses from the hedging derivatives (from sterling weakness) because of odd Eurostat guidelines; last year this accounted for around £10bn that would have never materialised in the National Accounts and could have perhaps been even more significant for the recent months following Brexit and sterling weakness.

Another take on the UK finances since the Brexit vote comes from Credit Suisse’s 2016 Global Wealth Report which estimates that UK household finances are $1.5tn worse off, equivalent to an average $33k reduction in value of accumulated assets per adult. Should Anglo policies continue to diverge alongside potential Trumpflation this in-dollar-terms write-down may just be the beginning for UK residents and investors. The report also calculates a $3.5tn rise in global wealth to $256tn but that this ‘wealth creation has merely kept pace with population growth’ for the first time since 2008. With such population growth slowing and the risks to global trade increasing, overall global growth faces strong downward/sideways pressures that regional pockets of fiscal stimulus and infrastructure spending will likely do little to offset.

With Brexit and the election of Donald Trump as US President, 2016 has been a year of political change, perhaps even revolution. Populist politics is seemingly the new zeitgeist as voters have vented their dissatisfaction with rising inequalities blamed on globalisation and more liberal policy agendas instead favouring more conservatism and protectionist approaches to areas such as immigration and potentially trade. This trend is also spreading to Continental Europe where the Italian referendum on constitutional reform is due on December 4 but could end up being a protest vote against the incumbent government and ‘economic malaise’. The ongoing primaries for the French Presidential Election next year are also sowing the seeds for a departure from the status quo with François Fillon, who comfortably won his party’s primaries on Sunday, predicted to easily win the presidency based on current polling. The clear message is that people in France are dissatisfied and frustrated with the status quo. With 283 terrorist related deaths since January 2015, an unemployment rate still around 10 percent, momentum looks to be with the candidates offering change.

Whether politicians can actually make a real difference to ageing so-called “developed” economies, is debatable. Against a backdrop of shrinking populations, growth will be very difficult to come by in many countries over the next decade or two and continual political change being a likely consequence. That is not true for all countries though with those running current account surpluses, with strong NFA positions and faster growing populations being the obvious candidates for bond investors looking for attractive alternatives.