MARKET UPDATE: BREXIT BRITAIN BEGINS WITH CHANCELLOR’S BUDGET

20th November 2017

LAST WEEK – KEY TAKEAWAYS

Food prices on the rise though UK headline inflation unchanged
UK inflation remained unchanged at a five-year high of 3% during October, wrong-footing analysts who had predicted a further rise. However, food prices rose 4% year-on-year, their fastest rate in four years as the fall in the pound pushed up the cost of living. UK wage growth was 2.2% between July and September, compared with a year earlier, while the UK unemployment rate was stable for the third month in a row at 4.3%. A new report from the Centre for Economic Performance has found that the average household is now paying £404 a year extra due to rising prices.

One step closer to US tax reform…
House Republicans have voted to pass plans for what could be the most significant overhaul of the US tax code in over 30 years, prompting treasury secretary Steven Mnuchin to say he expects the tax reform bill to be sent to president Donald Trump this side of Christmas. The Senate now must vote on its version of the tax plan, with suggestions over the weekend that the White House may be willing to remove a contentious provision to repeal the Affordable Care Act if it proves a hinderance to getting the tax bill through.

… as inflation climbs closer to 2% target
Core consumer prices in the US climbed 1.8% year-on-year to in October, up from 1.7% in September, and a step closer to the Federal Reserve’s 2% target. According to Bloomberg (20 November), there is currently a 92.3% probability of policymakers raising interest rates further at their next meeting on 13 December.

German coalition talks collapse…
Two months on from the election, and talks aimed at forming a coalition government in Germany have seeming collapsed. The Free Democratic Party (FDP), which received 10.6% of the vote in September, has pulled out of talks with chancellor Angela Merkel’s Christian Democratic Union (CDU/CSU) party. In what represents her biggest challenge in 12 years in power, Merkel may well have to face a second election, or form a minority government with the Greens.

… as its economy grows
The euro was last week buoyed by strong economic data from the eurozone’s largest economy as German GDP grew by 0.8% during the three months to end of September, beating the consensus estimate of 0.6%. The Federal Statistics Office (Destatis) attributed the rise to an increase in business investment, especially machinery and equipment. With an annualised growth rate of 2.8%, this is the fastest the German economy has grown since the first quarter of 2011. Italian GDP also surprised, growing at 0.5% during the three months to end of September, beating the consensus estimate of 0.3%.

LOOKING AHEAD – TALKING POINTS

All eyes on Hammond’s Autumn Budget

Chancellor Philip Hammond will deliver his third Budget statement on Wednesday, which watchers will hope delivers insight into the measures taken to ensure the success of the UK economy as it prepares to exit the EU. Having already made bold targets on bringing down public sector debt – and aiming to balance the books by 2025 – Hammond can expect borrowing to be up to £8bn lower this year. It is reported that the Treasury will pledge to build 300,000 homes per year with £5bn put aside for housing schemes, while the chancellor is also under pressure to ease financial pressures on the NHS and address public sector pay. Small businesses will be on tenterhooks with suggestions that the VAT threshold could be lowered from the current £85,000 limit on annual turnover.

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