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Brexit will test Chancellor’s Budget

29 October 2018

The reality of the government’s fiscal situation is that it will be dominated by economic growth in 2019-2020 and this will be highly dependent on the outcome of the Brexit negotiations, according to Edward Park, investment director at Brooks Macdonald.

He said: “The fact that the OBR increased its near-term growth forecasts but left its longer term projections subdued is telling, in our view. We expect Bank of England Governor Mark Carney to reiterate that UK growth looks set to remain relatively weak and highlight the risks associated with Brexit during his press conference after the Monetary Policy Committee’s meeting on 1 November.”

Luke Bartholomew, investment strategist at Aberdeen Standard Investments concurred, saying that while Philip Hammond was supported by “some good news from the OBR’s upgrade to the short-term outlook for the public finances” allowing for the major strategic decision taken in the budget to be how to spend the windfall and providing “a modest boost to GDP growth next year”, the medium to long term outlook “remains reasonably pessimistic”.

“This reflects the UK’s continuingly disappointing productivity record, and the fact that Brexit is likely to represent a further drag to potential growth,” he said.

“Overall, the Chancellor didn’t quite promise an “end to austerity” but the decision to ease fiscal policy next year and promise an increase in departmental spending does represent a significant evolution in the government’s position. We expect fiscal policy to provide a modest tailwind to growth over the next few years, but growth is likely to remain relatively mediocre unless the productivity growth finally starts to improve, and this budget will do little to change that.”

Park pointed out that political risk looked set to continue to dominate UK economic and investor sentiment “until clarity on Brexit is provided”.

“A transition deal still provides the best avenue for the government to boost the economy and we agree that the economy will benefit from a ‘deal dividend’ if a Brexit deal is reached; furthermore, we see scope for sterling to appreciate and put downward pressure on inflation, which would support real wage growth and, therefore consumption.

“Although our central expectation remains that a last minute deal will be reached, we are unable to hold high conviction in this thesis given the large number of binary political factors involved.”

He added that the DFM expected newsflow surrounding Brexit “will continue to generate volatility in UK asset prices, including sterling exchange rates, in the coming months.

“The closer we get to the secession date (29 March 2019) without a deal, the more volatility we expect to see. While UK assets will likely experience a relief rally if a deal is struck, depending on the detail, political uncertainty should remain elevated for an extended period and this is likely to weigh on domestic economic growth, and potentially UK assets, in the coming years.

“Asset valuations reflect these facts and we therefore hold a neutral outlook towards UK equities; however, we generally prefer international investments and remain underweight the UK in terms of exposure.”



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