- Growth rates cut compared to pre-referendum estimates
- Inflation estimates raised on weaker sterling, but possibly not far enough
- Focused spending on infrastructure and innovation is welcome
Growth estimates cut
UK GDP’s growth rate has been downgraded relative to pre-referendum expectations, with a cut from 2.2% to 1.4% for 2017E and from 2.1% to 1.7% for 2018E.
Inflation estimates raised
Following post-referendum sterling weakness, estimates for UK inflation were increased from 1.6% to 2.3% for 2017E and from 2.0% to 2.5% for 2018E. This compares to 2.4% and 2.8% for 2017E and 2018E respectively for UK swap breakeven rates.
Rising interest rate environment
With higher inflation expectations there is upward pressure on Bank Rates after a protracted “lower for longer” regime.
Spending focus: infrastructure and innovation
The government spending plans shows clearly defined cous – with budget to increase infrastructure spending from 0.8% of GDP today to 1.0-1.2% from 2020. This supply side stimulus that focuses on productivity gains is welcome if fiscally manageable.
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