Hunt, OBR Forecast the UK Will Avoid a Recession

Government Budget to Focus on Public Debt, Reducing Inflation and Economic Growth

UK Spring Statement Highlights:

OBR forecast that with the measures announced by Jeremy Hunt, the UK will avoid a technical recession but a modest contraction of 0.2%.OBR forecasts that inflation will fall from 10.7% to 2.9% by the end of 2023 – a fall of more than half which was originally targeted by the Tory governmentThe £2500 energy price guarantee extended for three monthsFuel duty remains frozen for another year with the 5p cut in the price of petrol and diesel remain in placeNuclear energy to be reclassified as ‘environmentally sustainable’ to allow same investment incentives as renewable energyFull capital expensing for business investment over the next 3 yearsEconomic incentives to attract early retirees, parents, and the long-term sick back into the workforceHunt abolishes lifetime allowance on pension savings entirely and annual allowance rises form £40k to £60k

OBR Forecast Eliminates UK ‘Technical’ Recession with Inflation to Fall Significantly

The Office for Budget Responsibility (OBR) forecast, taking into account the measures outlined by Hunt today, state that the UK will not enter into a technical recession as initially anticipated. Instead, the UK economy is expected to contract a modest 0.2%. Government has also committed to halving inflation and further forecasts from the OBR suggest that inflation will plummet from the current level of 10.7% to 2.9% by the end of 2023.

Getting Britain Back to Work

The UK government has identified as many as 6.6 million working aged adults (excluding students) that are economically inactive. The UK treasury believes this considerable number of economically inactive people is a major challenge for economic growth at a time when the UK is the only G7 nation with an economy smaller than it was before the pandemic.

Soaring energy prices, reduced productivity and low growth have plagued the UK economy, adding to the cost-of-living crisis. Jeremy Hunt, with his new proposals, is hoping to get early retirees, parents with young children and the long-term sick back into work.

Tax Rise for Corporates but Tax Breaks for High Earners

The budget confirmed the much-anticipated corporate tax increase from 19% to 25% with Hunt mentioning that even with taxes as low as 19%, the UK hasn’t seen the rate of growth expected. The higher rate still places Britain below the US, France, Canada, Italy, Netherlands and Germany as the treasury hopes their new business capital investment incentive will increase the UK’s attractiveness to do business.

Global Corporate Tax Rates

Source: IFS, prepared by Richard Snow

For individuals, Hunt was expected to raise the lifetime allowance for tax-free pension savings to around £1.8 million but decided to abolish the limit altogether, meaning high earners receive a generous tax break.

Market Response:

Understandably markets appeared to be focused on the rather unavoidable banking turmoil that ramped up again today as Credit Suisse suffered more negative publicity as its largest shareholder withdrew its financial support. EU banks have suffered as a result after yesterday showed a bit of a reprieve to the large-scale sell-off.

FTSE 100 5 Min Chart

Source: TradingView, prepared by Richard Snow

Cable traded sideways as the statement ensued, reflective of a market that is still trying to process what is happening in the global banking sector. Its not every day you see the dollar index (USD benchmark) rise as US treasury yields plummet.

GBP/USD 5-Min Chart

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX