With just hours to go until Mr Hammond gives his first major address as Chancellor, it has become clear that UK finances are in no healthy state for a big spending splurge. Despite an unexpectedly resilient post-Brexit picture painted by recent economic data, Hammond has a tough job on his hands.
Despite the economy growing more than expected, unemployment falling to an 11-year low and retail sales surging at the quickest rate in almost a decade, the economic outlook is set to worsen; Mr Hammond is going to have to borrow more than he wanted to whilst being very uncertain as to where the country will be, not just in five years’ time, but in as few as two years’ time.
Good news going into his address
On a positive note going into this address, Mr Hammond did receive an unexpected boost yesterday, with news that the government borrowed a lower than expected £4.8 billion last month, against expectations of £6 billion. A strong figure, once again defying Brexit “Doomsdayers” and an indication that Hammond has slightly more to play with than originally thought. However, this figure is a drop in the ocean when it is considered alongside the £100 million black hole in public finances which is expected by 2020 as the UK transitions through EU divorce proceedings.
Aside from the economic forecasts and particularly the government’s deficit figures, which will be driving the pound over the lunchtime period, there are other areas which the markets will be looking at quite closely.
Corporation tax – whilst we still remain part of the European Union, there are fairly strict rules as to what Mr Hammond can do here, but in her speech at the CBI conference on Monday, Theresa May stated her desire for the UK to have the lowest corporation tax of the world’s top 20 economies. Given that Trump appears be aiming for a corporation tax rate of 15%, that means we could expect corporation tax to be cut faster and further than expected, possible setting off a corporation tax war. Any surprises on the upside here could give a boost to the FTSE.
Housing – given the housing problems that the UK suffers, this is an area which is keenly watched by both the public and the wider housing sector. The expectation is that Hammond will pledge £1.4 billion aimed at delivering 40,000 new affordable homes in Britain. When considering the extent of the housing problem faced with here in Britain, this will not resolve the problem but at least it remains on the agenda. Calls to remove the stamp duty charge seem far-fetched but any news here would put wind in the sails of the housing sector and estate agent stocks.
Infrastructure – the planned spend on infrastructure has been well documented and although is dwarfed alongside Trump’s $1trillion dollar spending spree we could expect construction firms to take a step higher. Ashtead (LON:AHT) and CRH (LON:CRH), which have been big risers since Trump’s triumph could bet set to receive another boost.
Airlines – a cut in air passenger duty is one of the many policies aimed to help the JAMS by offsetting rising costs of holidays. Such a move could also give a boost to airline stocks.
Sterling - The main movements today can be expected on sterling. We foresee a relatively quiet morning heading into the Autumn Statement, with investor choosing to sit on their hands prior to the main event. GBP/USD is currently rangebound and would need to break above $1.25 for a convincing shot higher. Disappointment from Hammond could lead sterling to drop below $1.2390 then accelerating the slide southwards.
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