British finance minister Philip Hammond is set to announce some modest infrastructure spending and housing stimulus next week, according to a Reuters poll of economists that found widespread expectations of a marked easing-off on deficit reduction.
Britain is increasingly likely to rely on fiscal policy in the future as the same survey concluded decisively that the Bank of England, which shifted to a neutral stance this month, would not cut interest rates or increase the size of its asset purchase programme again any time soon.
Since Britain’s June 23 vote to leave the European Union, after which all the leading cabinet ministers were replaced, there has been a shift in tone about economic policy and more emphasis on the limitations of near-zero interest rates.
That change in the outlook was underscored by the BoE’s decision this month to dramatically revise up its near-term growth forecast while also making clear that a weak pound and expected higher inflation may prevent it from doing much more.
It also fits with a global trend that has rattled major sovereign bond markets in the week since Republican Donald Trump – who is advocating huge tax cuts for individuals and business – was elected the next U.S. president.
“By far the most likely policy loosening measure to be announced will be infrastructure spending,” said Alan Clarke, head of European fixed income strategy at Scotiabank.
Forecasts for how much the borrowing projection for fiscal 2017/18 would rise ranged from 10 billion to 40 billion pounds, but very few had a specific number. Clarke expected 20 billion.
“Big infrastructure investment projects are unlikely to be much help in the face of slowing growth next year. Long lead times may be to the Chancellor’s advantage – such a policy would have multi-year benefits; providing an offsetting boost to the Brexit fallout, which could also last years,” Clarke said.
Growth forecasts have not changed much in the past month, with very modest 0.1-0.2 percent growth expected for the current quarter and the start of next year, and 1.1 percent for 2017 as a whole, weaker than the BoE’s November forecasts.
There could also be changes on housing policy, which might include reversing or easing some of the measures that George Osborne, the previous chancellor of the exchequer, implemented this year such as raising stamp duty, or housing transaction tax.
The Reuters poll also showed most economists expect the unemployment rate to rise modestly through next year, moving from 4.8 percent currently to 5.5 percent by the end of next year, matching the BoE’s most recent forecast. Not one economist expected it to remain as low as it is.
But the tame inflation forecasts are perhaps the most striking in the poll, given how much the pound has fallen in the five months since the referendum. The forecasts for next year average out at 2.4 percent – short of the BoE’s 2.7 percent estimate – with 3.5 percent the highest forecast.
While the BoE has adopted a neutral stance, the ECB is expected next month to announce an extension to its asset purchase programme beyond March 2017.
The U.S. Federal Reserve is expected to raise interest rates next month, after being thrown off track several times since its initial hike nearly a year ago.
Source: Reuters (Polling and analysis by Purnita Deb and Krishna Eluri)