UK infrastructure spending and housing stimulus predicted

The British chancellor of the exchequer, Philip Hammond, will announce some modest infrastructure spending and housing stimulus next week, according to a Reuters poll of economists.

The UK is increasingly likely to rely on fiscal policy 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.

Britain’s vote to leave the European Union has seen a shift in tone about economic policy, with more emphasis on the limitations of near-zero interest rates.

That change in the outlook was underscored by the Bank of England’s decision this month to dramatically revise up its near-term growth forecast – while 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 the election of Donald Trump, who advocates huge tax cuts for individuals and business.

“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.

Borrowing forecasts

Forecasts for how much the borrowing projection for fiscal 2017/18 will rise range from £10 billion to £40 billion, but very few had a specific number. Mr Clarke expected £20 billion (€23.2 billion).

“Big infrastructure investment projects are unlikely to be much help in the face of slowing growth next year,” he said. “Long lead times may be to the chancellor’s advantage. Such a policy would have multiyear benefits [by] providing an offsetting boost to the Brexit fallout, which could also last years.”

Growth forecasts have not changed much in the past month, with very modest 0.1-0.2 per cent growth expected for the current quarter and the start of next year, and 1.1 per cent for 2017 as a whole, weaker than the Bank of England’s November forecasts.

There could also be changes on housing policy, which might include reversing or easing some measures made by the previous chancellor of the exchequer, George Osborne, such as raising stamp duty, or a housing transaction tax.

The Reuters poll also showed that most economists expect unemployment to rise modestly through 2017, moving from 4.8 per cent currently to 5.5 per cent by the end of next year, matching the bank’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 per cent (short of the bank’s 2.7 per cent estimate), with 3.5 per cent the highest forecast.

While the Bank of England has adopted a neutral stance, the European Central Bank is expected to announce in December an extension to its asset purchase programme beyond next March.

The US Federal Reserve is expected to raise interest rates in December, after being thrown off track several times since its initial hike nearly a year ago.

– (Reuters)