A budget for Brexit

U.K. Budget Leaves Bonds In a State of Suspended Inanimation

The OBR's cut to growth forecasts and Hammond's surprise boost to borrowing cancel each other out.
Chris J. Ratcliffe/Bloomberg

"This budget is about much more than Brexit," Chancellor of the Exchequer Philip Hammond told Parliament on Wednesday. Yet the U.K.'s pending exit from the European Union was the main driver behind deep cuts in the Office for Budget Responsibility's forecasts for growth in the coming years (and just about every other policy measure he announced).

Grim Expectations

The OBR has slashed its U.K. growth assumptions

Source: Office for Budget Responsibility

To put this in perspective, the downgraded projections mean gross domestic product per capita by the start of 2022 will be 500 pounds ($664) lower than was predicted in March, according to calculations by Matt Whittaker, the chief economist at think tank Resolution Foundation.

Lagging Behind

U.K. growth forecasts are lower than for the country's peers

Source for U.K.: Office for Budget Responsibility Source for remainder: Bloomberg's ECFC survey of economists' consensus forecasts

Weaker growth means more debt. The Debt Management Office duly added 29 billion pounds to the nation's planned borrowing in the coming five years, along with a surprise increase in this year's fiscal gilt sales to 115.1 billion pounds -- higher than the 114.2 billion pounds expected in March and confounding analysts' expectations for a reduction.

Borrowing More

Hammond raised the implied gross financing requirement by £57.9 billion pounds to 2021-22

Source: U.K.Debt Management Office

Implied forecast for 2022-23 was not made in the Spring budget

For bondholders, however, the two cancel each other out. The weaker growth outlook is likely to weigh on inflation in the coming years. That in turn reduces the likelihood that the Bank of England will follow this month's first increase in official borrowing costs for more than decade with further policy tightening beyond the couple of rate moves currently anticipated. Gilt yields have reached a state of suspended inanimation.

Becalmed (Before the Storm?)

Gilts have barely budged in the past month

Source: Bloomberg

It might not last. The U.K. looks like an outlier in growth terms, with the rest of the world economy enjoying a renaissance; gilts may find a rising global tide lifts all yields.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the authors of this story:
    Mark Gilbert in London at magilbert@bloomberg.net
    Marcus Ashworth in London at mashworth4@bloomberg.net

    To contact the editor responsible for this story:
    Jennifer Ryan at jryan13@bloomberg.net

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