Fidelity International: Commentary on Spring Statement
Commenting on today’s Spring Statement, Fidelity International’s fixed income and multi asset experts react.
Shamil Gohil, Fixed Income Portfolio Manager at Fidelity International, says:
'The Chancellor has replenished the fiscal headroom back to £9.9bn (spending rule), which may provide some relief in the short term, but this is a temporary fix, kicking the can down the road. Longer term, budgetary challenges remain as higher interest rates and weaker growth persist.
£10bn headroom is arguably not enough headroom compared to a planned ~1.5trn of spending and uncertainties ahead. The historical average has been closer to £30bn but recent governments have run it tighter. A £20bn number would have been more constructive for Gilts. Ultimately, the fiscal headroom is how the market quantifies and judges the Chancellor’s credibility. Gilts probably remain in no man’s land until the Autumn budget as we will likely to see some fiscal slippage and buffer erosion from now until then.
With the debt to GDP ratio over 100% and rising, it is hard to get out of the doom loop with a stagnant economy. An ageing population is not helping so continued structural reforms are needed to boost productivity. There are question marks on how the increase in defence spending will be funded. The impact of global tariffs is unknown and will likely erode any future surpluses (via lower GDP).
Today’s lower CPI print is likely temporary but should be supportive for front end UK rates as it reaffirms the likelihood of a 25bps cut in May. However, the UK may need to get accustomed to higher inflation and higher rates for the foreseeable future.'
Caroline Shaw, Multi-Asset Portfolio Manager at Fidelity International, says:
'The lower-than-expected inflation rate (2.8%) was a short reprieve for Rachel Reeves this morning and she was keen to announce the latest OBR forecasts which bring inflation back to the 2% target by 2027. However, this year the forecast is 3.2%. UK businesses are likely to need to raise prices to accommodate next month's tax rises (employer national insurance) and increases in the National Living Wage.
The UK growth forecast from the OBR has been downgraded to 1% (from the 2% announced at last year's UK Budget), although still above the Bank of England. The OBR estimates that reforms in planning and a commitment to building new homes should structurally increase GDP growth. Unlike defence spending, the majority of this should directly impact the UK jobs market and UK businesses.
Reeve's self-imposed, 'non-negotiable' fiscal rules could be a millstone round the neck of economic growth. Sticking to manifesto promises has left the government hamstrung in its efforts to generate growth potential. UK equities need a real growth impetus, with the ability for credible fiscal spending to support growth, alongside lower interest rates and it is hard to be optimistic given the backdrop.
Defence spending increases were pre-announced, but despite government assurances that this needs to benefit UK jobs and UK businesses, this money is likely to be spent mostly in the US, where the market leaders are based. The clear growth narrative was supposed to be from the UK housing sector. Subsequent UK governments have tried and failed to deliver on planning and housing spending and it is too early to tell whether today's positive rhetoric will deliver. UK housing stocks responded with price declines.
Within the UK, we think the outlook for gilts is more favourable than the outlook for equities. But inflation is the risk here as the Bank of England could remain in a difficult spot.'