The British economy was very much in the spotlight in the month of March as global investors eagerly awaited the annual government budget report from Chancellor Alistair Darling and his treasury.
As the clock ticks down towards May’s general election, local opinion poll results are suggesting that neither the Labour nor Conservative party looks set to win with a majority vote. ‘Hung Parliament’ is not an ideal situation for a nation desperately trying to drag itself out of the worst economic recession since the Second World War: it would create a sentiment of uncertainty around the short term-future of the British economy and its prospects for a return to growth. Also, the dreaded term ‘double-dip recession’ may also rear its ugly head, with financial markets likely experiencing increased levels of volatility without a clear economic strategy in place.
Mr. Darling’s budget delivery was clearly politically motivated, targeting the working class and pensioners. A pledge to cut the deficit by about 50% to 89 billion pounds by 2014 was a clear step to please the general voter.
Stamp duty relief for first-time home buyers, along with financial support for small businesses, clearly indicates that Labour feels the marginal seats in parliament are there for the taking. The ‘losers’ were, unsurprisingly, high street banks, tax evaders and the country’s top earners. The pre-election pitch was aimed at the UK tax payer who has felt hard done by in the last 18 months after shouldering the bulk of the fiscal support to the ailing British banking sector.
The Conservative retort slammed the budget as lightweight and lacking in the big steps needed to encourage economic recovery over the next 12 months and beyond, highlighting a lack of attention to the country’s huge debt.
David Cameron’s party have since announced a cut in National Insurance in a direct attempt to sway voters on middle and lower incomes.
Elsewhere, the British pound has come under pressure from almost every corner of the economy, reaching its lowest point for a year on an index against a basket of other major currencies. Bank of England policy member, David Sentance, did not rule out that another financial shock could derail the economy in the coming months. He also stated that interest rates would likely fall below the central bank’s target of 2%, dampening any thoughts of a hike before year end.
More worryingly, rating agency Standard and Poors brought down its outlook on the UK economy to negative, fuelling fears that Britain’s top sovereign rating may come under pressure as national debt levels escalate to record highs. It is widely predicted that the UK deficit will reach close to 13% of GDP by the end of the year, putting us in ‘Greece’ territory. To avoid a downgrade, the British Government, whoever that might be come June, will have to address the deficit, but not to such an extent that may harm any prospects of recovery for the UK’s private and public sectors.
Fundamental data has not been completely disastrous: the British employment sector took a much needed boost from UK claimant figures showing a drop of 32,000, the largest fall since 1997. This was also helped by an improvement in Retail Sales printing a 2.1% jump month on month and a modest 3.5% yearly gain.
Unfortunately, any positives have been outweighed by negatives, particularly from the Industrial and Manufacturing sectors. A drop of 0.4% and 0.9% respectively for the month of March triggered a sell against the pound, with Sterling falling three cents against the dollar on the day. As a result, the Bank of England will come under further pressure to take the necessary steps to prevent any further falls. It is the common view that the BoE’s fiscal support package has not had the desired effect on the British economy over the last 12 months, causing widespread caution over the UK falling back into recessionary territory.
Lastly, the final Q4 GDP number showed that the UK did in fact exit recession at the end of last year at a faster pace than initially thought. This did provide the pound with some support at the end of the month but the data has been received by investors with a pinch of salt as Core CPI is still down year on year.
The month ahead will no doubt have a political focus, with weekly opinion polls being scrutinized by economists looking for direction of UK economic policy for the remainder of the year. Any further moves towards hung parliament will likely spell disaster for the pound’s short-term prospects. Also, key inflation data will be eyed along with Bank of England comments and how that will translate to the Production and Retail sectors of the real economy. The outlook for Sterling in the next few weeks remains uncertain.
Source: Cutom House, Western Union