February 3, 2020

News in Charts: UK fiscal expansion to lift growth in coming quarters

by Fathom Consulting.

UK Chancellor Sajid Javid has announced that there will be a budget on 11 March — the new government is expected to get the chequebook out to finance public investment in infrastructure and other projects. After stripping out the effects of the economic cycle, the UK government’s current receipts exceed its current expenditure by an amount equal to 2.0% of GDP, with the impact of the post-2010 austerity programme clear.

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Fathom’s Macroeconomic Policy Indicator suggests that fiscal policy was broadly neutral for growth last year; with ample fiscal space, we expect to see additional stimulus sufficient to boost UK economic growth by 0.7%-0.8% in each of the next two years.

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In truth, the contribution of a change in fiscal policy to UK economic growth is likely to be time-varying, with Fathom research suggesting that the multiplier falls as public debt increases but rises as interest rates approach their effective lower bound. Despite the additional stimulus, UK growth is likely to remain south of 2.0% for the foreseeable future, even if investment rebounds in response to greater clarity regarding the outcome of Brexit. Indeed, in the medium term, the UK’s trend rate of growth is likely drift below 1.0% as the full impact of an ageing population becomes evident.

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Meanwhile, economic sentiment in the UK remains close to a ten-year low according to Fathom’s UK Economic Sentiment Indicator, which incorporates information from a range of consumer and business surveys. The index had hit a ten-year low in November, with political and Brexit-related uncertainty weighing on sentiment. However, given the decisive result of the referendum, and the subsequent certainty that the UK would leave the European Union, the government would have been hoping for more of a rebound in December. The index remained below zero suggesting that business and consumer sentiment remain weak. The government will be under pressure to lift the gloom and it may well see the loosening of the chequebook on 11 March as a good place to start.

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The charts in this article have been created using Chartbook on Datastream. The Chartbook, created and maintained by Fathom Consulting, is a library of over 9000 charts, containing up-to-date macro and financial market data for over 170 countries. Whether it is a particular topic, country or variable you are interested in charting, the Chartbook has everything you need. Simply type search ‘cbook’ into your Eikon search bar or click the ‘Chartbook’ tab on Datastream to find out more.



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