In yesterday’s Autumn Statement, Chancellor of the Exchequer Philip Hammond said the UK economy is set to be the fastest growing major economy in 2016, but the Office for Budget Responsibility (OBR) forecasts growth to slow and inflation to rise over the next two years.
Borrowing is going up
Mr Hammond reckons the government will need to borrow an extra £122bn, and that growth will likely ease back to 1.4% during 2017. Weaker consumer demand and uncertainty about the kind of deal Britain will make with the European Union are to blame, and the key drivers are the plunge in the pound and higher inflation since the referendum result.
Should investors be worried about this economic prediction? I think that depends where you invest. Growth may be set to slow but it will still be growth, and moderate inflation has its benefits, such as the way it diminishes the value of debts. However, some UK-facing cyclical sectors such house builders like Persimmon and Taylor Wimpey, property companies like British Land Company, estate agents such as Countrywide and retailers like Next could suffer if consumer confidence declines from here.
Overall, the Chancellor’s forecast sounds to me like benign economic conditions ahead. Right now, Philip Hammond reckons growth remains positive and employment looks set to rise in each of the next 5 years, with half-a-million more people forecast to be in work by 2021. Investors could do well if they stick to defensive sectors with firms operating internationally, such as pharmaceutical provider GlaxoSmithKline, consumer goods champion Unilever transmission system and utility firm National Grid.
Fiscal stimulus on the way
Although the government has cut its borrowing by nearly two-thirds since 2010, the Chancellor reveals that he is no longer aiming for a budget surplus by 2019 — where more tax is raised than is spent.
The Chancellor said new fiscal targets are needed to provide the flexibility to support the economy and create space for more investment, and he’s aiming for a 2% underlying deficit.
Among the changes in this statement are measures to put money into Britain’s transport, communications and housing infrastructure, and into encouraging and supporting research and development (R&D).
The construction and housebuilding sectors and other cyclical businesses seem set to be the biggest beneficiaries of the new fiscal stimulus announced yesterday, but whether shareholders in cyclical firms will benefit remains to be seen. Perhaps the new measures will work to prop up the businesses of cyclical firms rather than stimulating them to grow.
A balanced budget beyond 2020
The fiscal spending programme will be financed by running a budget deficit for longer than previously planned by the last chancellor George Osborne. A 2% deficit means the country will still be adding to its pile of debt. Between now and 2021 government borrowing would be £216bn, Mr Hammond said. However, he’s aiming for debt falling by 2020, and a balanced budget as soon as possible thereafter.
That’s a relief. I have been worried for a long time about Britain’s burden of ever-rising debt and its potential to plunge the country into austerity like we’ve never seen before, were things to go wrong.
Overall, I think it’s business as usual for investors on the stock market. As extraordinary as the economic times might seem to us now, great investors such as Warren Buffett have invested through many extreme economic events before us and done very well.