In response to today’s Spring Statement, Schroders’ investment and economic experts have provided their thoughts.
“The Chancellor had hoped this fiscal event would attract less scrutiny and volatility than previous ones, and so far that appears to be the case,” said James Ringer, Fund Manager, Global Unconstrained Fixed Income, Schroders. “This reflects, in part, the reduced significance of the Spring Statement following the shift to a single major fiscal event each year, as well as a marginally improved fiscal outlook.”
“There were only minor changes to policy and so the focus was on the Office for Budget Responsibility’s projections and Debt Management Office’s (DMO) gilt remit,” he added. “For us, the most important update came from the DMO. We had guidance that the public sector finances were looking better than expected back in November – thanks to better tax receipts, lower government spending and lower interest rates – and that was confirmed today. Although at the upper end of forecasts, the £252 billion borrowing planned for 26/27 was still a large improvement from the previous year and we saw another decline in the portion allocated to the long end.”
“Fiscal concerns are unlikely to fade entirely, but that does not stop cyclical improvement,” James concluded. “Much will depend on developments in the Middle East. Given the risks surrounding energy markets, we prefer to express our constructive view on gilts on a cross-market basis, going long gilts versus German Bunds and US Treasuries, while maintaining an underweight position in sterling as an additional hedge.”
Meanwhile, David Rees, Head of Global Economics at Schroders, said:
“UK Chancellor Rachel Reeves’ Spring Statement was very much the low-key update the government had promised,” said “After a period of significant fiscal events, today’s announcement amounted to little more than a refresh of the economic projections.”
“Inflation has been falling in recent months, largely due to food and energy disinflation. Further declines are expected, notably as budgetary measures kick in to lower energy inflation from April. Recent comments from policymakers suggest that the Bank of England is highly likely to seize on the subsequent decline in headline inflation to cut interest rates further.
“We have factored in 0.5% of easing across both the upcoming March and May meetings, but we remain concerned about underlying stickiness in services inflation. Moreover, we are yet to be convinced that the UK’s rising unemployment rate is opening up genuine slack in the labour market that will result in significant declines in pay growth.
“Meanwhile, recent increases in energy prices off the back of events in the Middle East cast doubt over future energy disinflation. If oil and gas prices remain elevated for an extended period, they could offset the disinflationary impact of the April budgetary measures and give the Bank pause for thought.
“If higher energy prices squeeze real incomes and prevent the Bank from cutting rates, hopes would be dashed for a growth pick-up in the months ahead. That, in turn, could ultimately force the Chancellor into action when fiscal watchers reconvene later this year – particularly if the recent increase in gilt yields continues.”
