Spring Statement: UK Economic Upgrade Expected

Schroders' Keith Wade tells Emma Wall the UK is in better shape than expected, and calls for the Chancellor to use the Spring Statement to support UK Plc

Emma Wall 13 March, 2018 | 11:07AM

 

 

Emma Wall: Hello, and welcome to the Morningstar series, "Market Reaction." I'm Emma Wall and I'm joined today by Schroder's Chief Economist, Keith Wade, to talk about the upcoming Spring Statement.

Hello, Keith.

Keith Wade: Hi.

Wall: So, So, we are speaking a few hours ahead of the Chancellor's first Spring Statement. Now, it is expected to be a bit of a non-event, but one of the things that we have had a leak on is that he is expected – Philip Hammond is expected to upgrade growth for 2017. What is he expected to move the figures to and what would be the main tailwinds for economic growth in the UK?

Wade: So, it looks as though growth for 2017 is going to come in at about 1.7%. So, that's a bit better than what was expected back in the autumn when they were looking at around about 1.5%. A couple of things have helped that. We've had a slightly better trade performance. We've actually had a little bit of better productivity performance as well. So, those factors have helped and of course, the consumer has kept spending as well. So, that's just lifted growth a little bit more than was expected a few months ago.

Wall: And if we were talking 18 months ago, when Brexit was imploding, exploding, significantly better than a lot have predicted, because we were supposed to be in a recession by now, weren't we?

Wade: Well, there were a lot of forecasts of recession. I think economists were a bit too pessimistic at that time and I think we would probably say that we were also in that camp. I guess, what surprised people was that consumers kept spending. People actually borrowed a little bit more and kept the credit going and kept going. But one area that has been weak and pretty much has as expected after the Brexit result was corporate investment, which has been very flat, and that has been disappointing, because we are in an environment now where globally investment is very strong. So, we are seeing strong investment in the US, Japan and in Germany as well. But the UK is not sharing in that and I think that is something he might want to look at.

Wall: So, if you were to write a wish list for the Spring Statement, would sort of plc supportive policy be in there given what you've just said?

Wade: Well, I think so. I mean, of course, one of the main reasons why investment is weak is because of the uncertainty over Brexit. So, in many ways, what most of UK plc wants is to get some clarity and go on with the Brexit talks and get a trade deal, get a transition period and then people can plan for the future. So, that's very important. But it might be if he wants to do anything, then he might try and direct something towards maybe improving the environment for investment, maybe some allowances or something like that to encourage investment in the UK.

Wall: And what about what this recent uptick in growth means for the Bank of England and for interest rate rises? Because if we are in a slightly more robust economic environment than what was expected, does that mean we should see a rate rise this month or indeed for the rest of the year?

Wade: Well, I mean, the market is just about pricing in a rate rise for May. We still think that's a little bit early because again, I think, you don't want to damage confidence at this early stage. And we know that we are getting into the difficult part of the Brexit negotiations on the trade. So, if they were to raise rates and it was a difficult time and there was some adverse comment coming from Brussels or what have you, I think that could be quite damaging. The Bank of England is working on the basis of a smooth Brexit. It seems to us that there won't be real clarity on that until much later on in the year. So, we still think that November is probably the most likely point at which interest rates begin to rise.

Wall: Keith, thank you very much.

Wade: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Emma Wall

Emma Wall  is Senior International Editor for Morningstar