No great budget surprises (Video)

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Even for those beyond UK shores, today’s budget should be of interest because austerity is the only game in town for many European countries and the UK is further down that path than most, at least in terms of implementation. 

There used to be a time when UK budgets were a closely guarded secret, but that’s long gone.  As such, even though the Chancellor cannot afford any net fiscal give-aways, we know that some subtle shifts in the tax burden will be made. Video:

The Chancellor will be able to announce that borrowing for the current fiscal year, which ends this month, will be broadly in line with the forecast made a year ago, which contrasts with the fiscal slippage being seen in several other European countries.

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But the UK remains on a fiscal knife-edge, with the economy expected to grow by less than 1% this year. Sterling has been performing relatively well of late, in part helped by the UK’s relatively comfortable fiscal performance but also helped by the changing dynamics of FX markets, which are shifting the focus away from carry and risk. From the sovereign risk, growth and policy viewpoint, sterling is perceived to be the better of the bunch, at least within Europe.

Commentary

The Saudis step up.  Justifiably concerned about the consequences of the elevated price of oil, Saudi Arabia has decided that enough is enough. The world’s largest producer of black gold will raise oil exports to the United States significantly, and re-open some oilfields to boost overall production. Apparently 11 super-tankers, each able to transport 2m barrels of oil, have been hired by Riyadh destined for ports in the Gulf of Mexico over coming weeks. Announcing the measures this week, the Saudis stated that they are committed to working with individual nations “for the return [of]oil prices to fair levels”, which they claimed recently was around USD 100 per barrel. Inflation in some of the world’s largest economies is already climbing because of the surge in oil prices over recent months. China has just lifted both petrol and diesel prices markedly for the second time in six weeks, and Indian wholesale inflation jumped to nearly 9% last month.  With confidence still fragile and many of the world’s larger economies still engaged in a process of balance sheet-repair, the elevated price of oil represents a major risk. Given the heightened tensions in the Middle East with respect to Iran, it remains to be seen how much effect this intervention by Saudi Arabia has. The initial response has been rather muted.

More Chinese growth concerns.  The China Association of Automobile Manufacturers this week intimated that vehicle sales in 2012 will be lower than expected; indeed, even 5% growth may prove difficult to achieve. Monday night’s decision by the government to raise gasoline and diesel prices by around 7% came sooner than expected and will also have a negative impact on vehicle demand, especially for commercial vehicles. Fuel charges were increased just six weeks ago, so this latest increase will merely add to concerns over the price for fuel. In the first two months of 2012, vehicle sales fell by 4.4%, the worst performance for seven years. In response, demand for tyres is slowing as well, with one of China’s prominent rubber manufacturers forecasting growth in tyre production this year of just 5%. Separately, BHP President of Iron Ore, Ian Ashby, claimed that steel growth in the world’s second largest economy had flattened, and that “the big infrastructure build clearly will come to some end”. This constant drip-feed of negative economic news continues to drag on sentiment in the equity market, with the Shanghai Composite down another 1.4% Monday night. In relative terms, Chinese equities have been a financial disaster over recent years, quite remarkable in view of the spectacular economic success that the country has enjoyed. Profit growth has simply not been forthcoming from this extraordinary growth and last night it was announced that state-owned companies experienced an 11% decline in profits in the first two months of this year.  Despite protestations from policy-makers that all is still on track, investors have every justification to be concerned about the decided down-shift in China’s growth performance. As a result, it is not surprising that the renminbi and the Aussie are looking more vulnerable these days.

Return to UK inflation disappointment.  Yesterday was the first time the UK inflation numbers have come out higher than expected, the February reading at 3.4%. Still, that is a 14-month low and inflation is still headed lower over the coming months as the sharp price increases seen last year work their way out of the year-on-year calculation. For the February numbers, it was lower energy costs that was the main contributory factor to the falling headline rate, with both gas and electricity prices falling during the month. These price reductions were well flagged (not least because they have increased so much in the past few years), but there were still modest deflationary forces evident in recreation & culture and transport together with clothing & footwear prices. No real surprise to see fuel prices pushing inflation higher, given the recent record high in sterling wholesale fuel costs. If anything, the signs are that inflation is not falling quite as fast as the Monetary Policy Committee (MPC) expected, the November inflation report showing it nearer to 3% by this stage. Furthermore recent fuel and also food price developments mean that the pace of decline could continue to disappoint in coming months. Last month the MPC decided to increase its asset purchase program by another GBP 50bln, but at the same time we are seeing talk of possible rate increases in the UK. It’s not widespread, but nevertheless can also be seen in the slight climb higher in forward overnight swap rates. The MPC has long held the view that the QE program does not have to be reversed before rates increase. On balance, we don’t expect rates will rise this year, but if inflation continues to disappoint, then the debate could gain some traction.

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