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UK budget: no recession in 2023; UK assets sink in global market turmoil

Chancellor of the Exchequer Hunt holds the budget box outside Downing Street in London

LONDON, Mar 15 (Reuters) - Britain is no longer forecast to enter a recession this year, finance minister Jeremy Hunt said on Wednesday, adding that inflation was forecast to fall to 2.9% by the end of the year.

"Today the Office for Budget Responsibility forecast that, because of changing international factors, and the measures I take, the UK will not now enter a technical recession this year," he said as he presented his budget in parliament.

"Despite continuing global instability, the OBR report today that inflation in the UK will fall from 10.7% in the final quarter of last year to 2.9% by the end of 2023."

In a separate release, the OBR said the peak-to-trough fall in GDP was likely to be just a quarter of the 2.1% fall assumed in its November forecast.

The pound was last up roughly 0.8% against the euro, but sank against the dollar, as a rout in global banking shares hit investor confidence in risk-linked assets such as equities with London blue-chip stock index sliding.

MARKET REACTION:

STOCKS: The FTSE 100 was down nearly 3%, under pressure from a rout in global bank stocks, while the domestic-focussed midcap index fell 2%.

FOREX: The pound was under pressure against the dollar, dropping 0.8% , but rose against the euro by 0.9% to 87.52 pence.

MONEY MARKETS: UK bond yields pared some of their daily declines, with the 10-year yield last down 18 basis points at roughly 3.30%, compared with a session low of 3.289% when Hunt began talking.

COMMENTS:

HELEN DICKINSON, CHIEF EXECUTIVE OF THE BRITISH RETAIL CONSORTIUM, LONDON:

“In the face of volatile demand caused by high inflation and low consumer confidence, measures to support households with the cost of living, such as the ongoing energy bill support and changes to childcare costs, are welcomed.

However, many businesses are weighed down by a myriad of higher costs right through the supply chain. Government must do more to limit one of the biggest drags to retail investment, which is oncoming regulatory burdens heading down the track, or risk a crash in business investment and further inflationary pressures."

KENNETH BROUX, SENIOR FX AND RATES STRATEGIST, SOCIETE GENERALE, LONDON:

"The OBR has come round to the view that the outlook for the British economy is not as gloomy as they first projected. The less downbeat outlook has magnified EUR/GBP losses, which dropped first thing because of the sell-off in financial stocks.

"The instability has raised questions if the ECB will go ahead and raise rates by 50 bps as originally planned tomorrow. The repricing of a lower ECB terminal rate is weighing on the euro."

EDWARD PARK, CHIEF INVESTMENT OFFICER, BROOKS MACDONALD, LONDON:

"I would view this very much as a budget for the bond market."

"It's three factors: it's the budgetary forecasts, it's the focus on tackling inflation, but also the tone, which is one not of austerity, but a conservative approach to managing the budget and managing fiscal spending."

"When the dust settles, international investors will be constructive around the type of budget we've had today, which suggests a calmer approach to managing the UK. That will benefit gilts and that will benefit sterling."

DAVID KAYE, CHIEF EXECUTIVE OFFICER, PUMA INVESTMENTS, LONDON:

"The new local investment zones that were given the go-ahead today to drive business investment in key areas such as the tech sector and creative industries will help to level up the country. However, as often with the planning system, the devil will be in the detail and that remains to be set out.

"We hope sufficient thought will be given as to how this initiative will create conditions for meaningful investment right across the UK, and not prove to be a case of picking ‘winners’ at the expense of other regions."

SUSANNAH STREETER, HEAD OF MONEY AND MARKETS, HARGREAVES LANSDOWN, LONDON:

"Jeremy Hunt wasted no chances in pulling the biggest rabbit from his hat, brandishing the forecast from the Office for Budget Responsibility that the UK will swerve a recession this year. Things were already looking up, with consumer and business confidence rising, and spending proving much more resilient."

"But given that the cost-of-living crisis is still proving painful, economic activity is still likely to be slow to power up and a period of stagflation not super-charged growth is still expected. The Chancellor is gearing up to deliver fresh incentives to loosen a tight labour market, spark greater productivity and bring in foreign investment but it’s going to still be a hard slog ahead."

IAN PLUMMER, COMMERCIAL DIRECTOR, AUTO TRADER, LONDON:

"The Chancellor's decision to extend the 5 pence fuel duty cut for another year is good news for the vast majority of drivers struggling with the cost of living.

"But one thing it won’t do is encourage demand for electric vehicles even though the 2030 ban on sales of new petrol and diesel cars looms ever closer.

"Since last summer demand for EVs (electric vehicles) has fallen back and the Chancellor should be ready to use the tax system to encourage drivers to make the switch by reducing VAT on the public charging networks."

(Reporting by London Markets Team; Editing by Amanda Cooper and Dhara Ranasinghe)