Sunak to reveal all
3rd March: Highlights
- 5%+ increase in unemployment means Sunak’s plans must work first time
- Confidence high as vaccinations and stimulus kick-in
- EU likely to lower H1 growth forecast
A Budget for jobs recovery and growth expected
In spite of calls from senior Conservatives from another era to raise taxes, Sunak will add to the vast increase in Government borrowing he has embarked upon to ensure that first the country survives the Pandemic economically, then it recovers to take its place in the world post-Brexit.
He is likely to take his cue from the plans already in place to end the lockdown in stages and effect a gradual change from support to stimulus.
There have been several leaks, most likely intended, of his plans. The focus will be on employment, those sectors of the economy most badly hit by the Pandemic and a British staple, property.
One of the most significant measures Sunak put in place at the height of the Pandemic was the stamp duty holiday. While that has been effective, it has only been of help to those either already on the property ladder or with sufficient funds to enter the market.
While it is unclear whether he will end the stamp duty holiday, he is reportedly going to reintroduce the 95% mortgage. This was blamed for an overheating of the market when it was done previously.
It resulted in lenders requiring at least a 10% deposit which meant that as house prices rose, particularly in the south east of England that mortgages became harder to get.
While inflation is beginning to become a factor, Sunak will leave monetary policy to the Central Bank and concentrate on a fiscal boost. He has clearly decided against the policy of the U.S. administration in which payments are made direct to households in order to boost spending and therefore activity.
With household savings rates at all-time highs, the pent-up demand that will be released when shops reopen next month should be sufficient to provide further stimulus of its own.
High street shops and hospitality venues will receive a direct cash grant to help them over the cash-flow shortage that will inevitably happen in the first few weeks of reopening.
Taxation and curbing inflation will be topics for another day, while the level of optimism being generated by the potential reopening of society coupled with the success of the vaccination rollout means that Sunak can deliver the most expansive Budget in a generation.
The pound found some support in the mid 1.38’s versus the dollar yesterday. From a low of 1.3859, it rallied to close at 1.3966.
Dollar index trading off economic optimism
The use of the Johnson and Johnson vaccine which only needs one dose will be a key driver of the programme and President Biden expects every adult to have been offered a jab by the end of Spring.
Various economic confidence surveys conducted this week have already seen major increases in consumer and business confidence that are likely to grow as the cheques start arriving at households that are desperately in need of support.
As in the UK as the Pandemic subsidies, there will be a switch in emphasis from support to stimulus and the focus will be on employment and job creation.
President Biden’s long-term plan is to repatriate jobs that were exported to Asia and to preside over the regrowth of American manufacturing, particularly in the area of vehicles where the advances in technology have come mostly from overseas.
Lael Brainard, widely tipped to be Jerome Powell’s successor, made a significant and wide-ranging speech yesterday. She spoke of how the Fed will remain patient in any change to monetary policy. This, she believes, will allow the economy to recover fully and become self-sustaining before inflation needs to be tamed.
She went on to comment on concerns over asset valuation and some overstretching although this is expected to be a short-term phenomenon.
Monetary support will also need to remain as there is still plenty of work to do in the areas of employment and controlling inflation.
The recent volatility in the dollar index shows no sign of abating just yet.
Yesterday, it returned to positive territory, climbing to 91.39 but fell back to close at 90.77. A break of 91.60 will cement the lows around 89.80/90 and see the correction become more solid.
Unemployment, the great imponderable
Q1 GDP is likely to be negative as the Union grapples with poor delivery and take up of vaccinations that has seen other G7 nations be able to plan for the reopening of their economies. The Eurozone is some way away from such a move.
Fabio Panetta, a former Director General of the Bank of Italy, and current member of the Board of Governors of the ECB spoke yesterday of the need for support to remain in place long after the recovery is solid, and the Pandemic is over.
This appears to be wishful thinking on Panetta’s part as there is little doubt that certain members of the Union fear inflation growing out of control and that they will insist on tighter policy.
There will need to be a light tough as Christine Lagarde begins to taper the bond purchase scheme as rising rates will make repayment of debt more difficult to achieve.
Inflation had been controlled in part by a strong and strengthening currency but in another blow yesterday, several banks recalibrated their expectations and commented that an imminent fall through the 1.20 level versus the dollar would presage a drop back to the 1.15 area.
This will add to inflationary pressures, especially if it coincides with any reopening of the economy. It will however make exports more attractive.
The threat of a more difficult trading relationship with the U.S. remains as the argument concerning state subsidies to Airbus and Boeing continues.
This is a sector of the economy that will struggle to recover since it will take some time for the public to regain their confidence in air travel and new plane orders have collapsed.
The euro remains in the thrall of the dollar. Yesterday, it fell to a low of 1.1991, but rallied to end the day at 1.2089.
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”