Given that the Office for Budget Responsibility cut its 2016 GDP forecast to 1.4% from 2.2% and now expects potential growth to be 2.4% lower over the next few years, the Chancellor of the Exchequor's first and final Autumn Statement was focused more on insulating the economy from the vagaries of a post-Brexit world than it was about short term surprises. And, as such, was welcomed by a market heartily sick of surprises.
Hammond said: “Our task now is to prepare our economy to be resilient as we exit the EU. And match-fit for the transition that will follow. So we will maintain our commitment to fiscal discipline. While recognising the need for investment to drive productivity. And fiscal headroom to support the economy through the transition.”
Rightly, Hammond focused in on the productivity gap and explained that he was willing to spend more now to see it shrink over time. But, largely because of the uncertainty around Brexit, he was unwilling, as Neil Williams, group chief economist at Hermes put it “to let his fiscal guard down completely”.
Hammond committed to short term infrastructure spending to be paid for through an increase in borrowings and announced tax cuts for lower-income families, among other things that went some way toward an end to the austerity of his predecessor. But, as Williams pointed out, this is more a deferral of the squeeze than an outright removal of it.
More important for investors is whether or not the programmes announced will be able to achieve the successful transition of the economy that Hammond outlined.
For Richard Buxton, head of UK equities at Old Mutual Global Investors, The devil of this lies in the detail of the macroeconomic assumptions on which his plan is based.
“My reading of the OBR’s GDP growth forecasts is that the government’s ‘spending watchdog’ expects sentiment – in the broadest sense – to be more buoyant in the second half of 2017 once Article 50 has been triggered. The question is, why would growth slow so much in 2017, then inexplicably pick up in subsequent years?” Buxton asked.