Another Stimulative Week For UK Policy
The last week has seen a number of significant developments linked to the UK policy agenda.
First, there were important comments from Bank of England Deputy Governor Ben Broadbent. Never mind the data, it's the Bank's judgement that is key, might be best way to summarise his key message. That is, monetary policy may be less data dependent than previously in the wake of the Referendum vote. Although the economic data has been solid and business and consumer confidence has recovered since the vote, Broadbent's message was that the Bank thinks the economy will suffer. And thus it will be the judgement of the various committees that will drive policy.
In recent weeks, stronger domestic data has led the market to conclude the Bank will put policy on hold. In contrast, we have stressed the Bank still has a bias towards easing. That is still the message. But how far will this go? Well, the Governor has ruled out negative rates and "helicopter money", the latter effectively being an extreme version of injecting money into an economy. It is not clear what the other committee members think on these issues, but it would be foolhardy of them to ignore the data, or indeed the impact of a weaker pound and easier fiscal stance. As all of these may suggest less of a need to adopt extreme monetary measures but the Bank is still sending the message that they will do more, if they feel it is needed.
Second, there was the fiscal message from the Chancellor in his Party Conference speech. There is to be an evolution not a revolution of policy, towards injecting more spending into the economy. Full details will be unveiled on November 23rd in the Autumn Statement. Hammond is still cautious about relaxing fiscal policy too much. I think he would like to focus as much on improving the quality as opposed to the quantity of fiscal spending. Hence he mentioned keeping current expenditure under control while focusing more on infrastructure spending.
Also, the background to the Autumn Statement may limit his room for manoeuvre. The independent forecaster, the OBR, will likely be like the bulk of economic forecasters. Even though the post Referendum data has been stronger than consensus expectations they will project a slowdown next year and a hit to growth. The message then to the Chancellor will be that more of the deficit is structural and so he should not relax fiscal policy much, if at all. Hopefully, the Chancellor will recognise the pro-cyclical nature of this likely advice and still ease sufficiently.
On the encouraging side, even though there may be a lack of shovel ready projects I would expect the Chancellor to indicate that future fiscal policy will be more regionally focused on infrastructure and on helping the supply side of the economy, thus being good for economic growth and underpinning a key component of his conference speech. This would be good news for the economy and for longer term investors looking at UK assets.
Third, of course, is that all of this is set against the backdrop of the Prime Minister announcing a triggering of Article 50 by next spring. This has added fuel to the debate on a hard versus soft Brexit - or as I prefer to call them, a clean versus messy Brexit. I will return to this in further notes, but for now it has truly ignited the policy debate and in turn contributed to a weaker pound.
So the policy message this week is: confirmation of a bias towards easing monetary and fiscal policy and a further softening of the pound. The net effect will be positive for growth. The key focus now will be on what happens to economic confidence and in particular to consumer spending and in particular to private sector investment? As the International Monetary Fund said, as they released their latest World Economic Outlook in Washington this week, they now expect UK growth to be higher than they previously thought this year but to slow next. We shall see. Investors, though, recognise that all of this is helping to propel UK domestic large-cap stocks higher and the pound lower.
First, there were important comments from Bank of England Deputy Governor Ben Broadbent. Never mind the data, it's the Bank's judgement that is key, might be best way to summarise his key message. That is, monetary policy may be less data dependent than previously in the wake of the Referendum vote. Although the economic data has been solid and business and consumer confidence has recovered since the vote, Broadbent's message was that the Bank thinks the economy will suffer. And thus it will be the judgement of the various committees that will drive policy.
In recent weeks, stronger domestic data has led the market to conclude the Bank will put policy on hold. In contrast, we have stressed the Bank still has a bias towards easing. That is still the message. But how far will this go? Well, the Governor has ruled out negative rates and "helicopter money", the latter effectively being an extreme version of injecting money into an economy. It is not clear what the other committee members think on these issues, but it would be foolhardy of them to ignore the data, or indeed the impact of a weaker pound and easier fiscal stance. As all of these may suggest less of a need to adopt extreme monetary measures but the Bank is still sending the message that they will do more, if they feel it is needed.
Second, there was the fiscal message from the Chancellor in his Party Conference speech. There is to be an evolution not a revolution of policy, towards injecting more spending into the economy. Full details will be unveiled on November 23rd in the Autumn Statement. Hammond is still cautious about relaxing fiscal policy too much. I think he would like to focus as much on improving the quality as opposed to the quantity of fiscal spending. Hence he mentioned keeping current expenditure under control while focusing more on infrastructure spending.
Also, the background to the Autumn Statement may limit his room for manoeuvre. The independent forecaster, the OBR, will likely be like the bulk of economic forecasters. Even though the post Referendum data has been stronger than consensus expectations they will project a slowdown next year and a hit to growth. The message then to the Chancellor will be that more of the deficit is structural and so he should not relax fiscal policy much, if at all. Hopefully, the Chancellor will recognise the pro-cyclical nature of this likely advice and still ease sufficiently.
On the encouraging side, even though there may be a lack of shovel ready projects I would expect the Chancellor to indicate that future fiscal policy will be more regionally focused on infrastructure and on helping the supply side of the economy, thus being good for economic growth and underpinning a key component of his conference speech. This would be good news for the economy and for longer term investors looking at UK assets.
Third, of course, is that all of this is set against the backdrop of the Prime Minister announcing a triggering of Article 50 by next spring. This has added fuel to the debate on a hard versus soft Brexit - or as I prefer to call them, a clean versus messy Brexit. I will return to this in further notes, but for now it has truly ignited the policy debate and in turn contributed to a weaker pound.
So the policy message this week is: confirmation of a bias towards easing monetary and fiscal policy and a further softening of the pound. The net effect will be positive for growth. The key focus now will be on what happens to economic confidence and in particular to consumer spending and in particular to private sector investment? As the International Monetary Fund said, as they released their latest World Economic Outlook in Washington this week, they now expect UK growth to be higher than they previously thought this year but to slow next. We shall see. Investors, though, recognise that all of this is helping to propel UK domestic large-cap stocks higher and the pound lower.
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