Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: And now onto today's show.
Speaker: The following podcast was recorded on the 23rd of November 2023 by HSBC Global Research.
Speaker: All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Speaker: Remember, you can follow this weekly podcast on Apple and Spotify or wherever you get your podcasts by searching for The Macro Brief.
Speaker: Hello and welcome to The Macrobrief.
Speaker: I'm your host, Piers Butler in London, and today we're focusing on the outlook here in the UK.
Speaker: This week, Chancellor Jeremy Hunt delivered his autumn statement, where he announced £20 billion worth of tax cuts.
Speaker: But with a weak growth outlook, inflation close to 5%, the public finances already strained, are they affordable?
Speaker: Our UK team took their views on the road last week, presenting to hundreds of clients at events in London and Birmingham.
Speaker: And we're joined by one of the headline speakers, our senior UK economist, Liz Martins.
Speaker: Hi Liz, welcome to the podcast.
Speaker: Thank you.
Speaker: Busy time for you with this autumn statement.
Speaker: Can we say that the Chancellor got lucky and he took advantage of it?
Speaker: I think we can say that.
Speaker: I mean, a few weeks ago the papers were reporting that he was looking at a £19 billion black hole in the public finances, which would have essentially required either tax rises or spending cuts.
Speaker: to block up.
Speaker: But actually the turnaround over the week since then means that when he came to give his update, he was faced with a £30 billion surplus or headroom against his target.
Speaker: So this was a £50 billion improvement in the space of a few weeks, which meant that he really did have the best of all worlds.
Speaker: He was able to announce lower borrowing, more headroom, double the headroom against the target and £20 billion of giveaways.
Speaker: So how does this improvement come about?
Speaker: I mean, this is a revision of numbers.
Speaker: I mean, it feels sort of slightly unreal.
Speaker: Yeah, it's extraordinary.
Speaker: Essentially, the Office of Budget Responsibility calculated that, you know, all else equal revenues would be £70 billion higher by 2028 than it had previously been forecasting.
Speaker: Now, that's partly because the economy was bigger than it had been forecasting, partly because inflation and wage growth is higher.
Speaker: And a lot of that comes from this so-called fiscal drag.
Speaker: So this is people whose earnings have gone up,
Speaker: which brings them into either paying tax for the first time when they previously weren't paying tax, or into the higher bracket, or even into the top rate, the additional bracket.
Speaker: And that's going to earn the government an additional £45 billion, according to the OBR's forecast, and that really gave them all that extra room to play with.
Speaker: You do make reference in your note to fiscal fictions.
Speaker: What do you mean by that?
Speaker: Yeah, so fiscal fictions are spending cuts or tax rises that are implied by the forecast, but which in reality are probably going to be incredibly hard to deliver.
Speaker: So this is things like the fuel duty being unfrozen.
Speaker: You know, every budget update since 2010, it's been frozen at current levels, but according to the official forecasts, it's going to rise.
Speaker: So when it's then unfrozen or frozen for another year, that costs an extra, you know, an extra few billion pounds.
Speaker: But the big one is spending cuts, because in order to make all the numbers add up, and this headroom makes sense, the implied number is that departmental spending will have to be cut quarterly.
Speaker: quite sharply.
Speaker: The OBR thinks by about 2.3% in real terms per year for unprotected departments, which is huge.
Speaker: And realistically, given the state of public services, and we put a study in one of our recent notes by the Institute for Government, which showed that for most public services, they are worse or much worse than they were when the Conservative government came to power.
Speaker: in 2010.
Speaker: So you've got, you're paying more tax for less and we've got these implicit spending cuts coming down the tracks.
Speaker: Now it may be that that's not the Conservative government's problem, that's another government that comes in after the election, but it will be a problem for whoever comes in to try and balance the books.
Speaker: So how is the Bank of England going to take all this?
Speaker: Well, I mean, in theory, if you cut tax, you stimulate demand and that's inflationary.
Speaker: But actually, I think because these tax cuts really only offset a fall in people's incomes, and that comes from the big rise in cost of living, but also, you know, from the fiscal drag that I was talking about.
Speaker: So the government takes with one hand, gives a little bit back with the other.
Speaker: it's not massively going to stimulate demands and inflation.
Speaker: So we don't think, I mean, the Bank of England made a similar assessment after the last autumn statement, similar amount of tax cuts, they added 0.1 to their inflation forecast.
Speaker: So it might be something in that magnitude.
Speaker: But I think what's more interesting to the Bank of England is not the fiscal measures, but the announcement
Speaker: that the national living wage is going to go up by another 10% in April.
Speaker: Now, at the Conservative Party conference, they told us it might be going up to around £11 an hour.
Speaker: They've actually announced it's going up to £11.44 an hour.
Speaker: So it's the same rate of growth as we had in April 2023, which of course is part of the reason why the UK's got such strong pay growth overall.
Speaker: and hence such strong services inflation.
Speaker: So I was surprised that the increase was quite that large.
Speaker: And I think, you know, great news for those earning that money.
Speaker: And I don't want to underplay that fact.
Speaker: People have had a really tough time in recent years.
Speaker: But for companies, it is a cost and it may keep inflation higher and companies may end up passing that back on to us.
Speaker: So from interest rate policy perspective, we're not looking for any changes.
Speaker: That's right.
Speaker: And, you know, the market's shifted a long way.
Speaker: So we're not looking for any cuts until Q1 of 2025, which used to be broadly, you know, what the market thought.
Speaker: But on the back of the lower inflation numbers, expectations of slower economic growth, the market's brought forward its expectations to the first quarter.
Speaker: rate cut to actually the first half of May or June of 2024, which is obviously much sooner than our forecast.
Speaker: But we think inflation and wage growth is still going to be too high at that time to be cutting interest rates.
Speaker: And really, if the bank is cutting interest rates by that time,
Speaker: it's because inflation has fallen off a cliff or it's because the economy has really slowed down and our employment has really risen.
Speaker: And we don't see that either.
Speaker: We don't think we're going into recession.
Speaker: We're in a kind of a stagnation with somewhat high inflation, but, you know, nothing to urgently necessitate these rate cuts.
Speaker: So, of course, economists' forecasts have been known to be wrong.
Speaker: We may be wrong, but at the moment, you know, the conditions we think are too inflationary to be thinking about rate cuts.
Speaker: So we know that there's going to be an election in the UK next year.
Speaker: Do you think that this autumn statement is an electoral game changer and that we could have an election sooner rather than later on the back of it?
Speaker: Well, look, we'll find out in the coming sort of days and weeks whether it makes a dent in the polls.
Speaker: At the moment, of course, the opposition Labour Party has a massive lead over the Conservatives.
Speaker: So the Conservatives will be hoping...
Speaker: that the tax cuts announced in the autumn statement do something to bridge that gap.
Speaker: But the coverage has been mixed.
Speaker: You know, the media headlines will say, yes, you're getting a tax cut on the one hand, but on the other hand, this fiscal drag effect means that probably for most people, you won't be better off because of it.
Speaker: So people know that, I think, and that may be one reason why it's not a game changer.
Speaker: And actually, the Office of Budget Responsibility thinks that all the measures will add 0.3% to growth.
Speaker: So it's not huge.
Speaker: It's certainly not what you'd
Speaker: described as a game changer.
Speaker: And then the very next morning after the autumn statement, we got these migration numbers, which show they are migration is still running very, very high by historical standards.
Speaker: And although, you know, generally attitudes in the UK have softened towards migration, for many
Speaker: conservative voters or potential conservative voters, immigration is a real issue.
Speaker: So the headlines are very quickly switched from, you know, taxes are cut to migration is up.
Speaker: So, you know, we'll see what happens in the polls.
Speaker: But no, I don't think it probably is a game changer.
Speaker: Well, we look forward to further updates from you, Elizabeth.
Speaker: For now, thank you very much.
Speaker: Thank you.
Speaker: Before we go, here are a couple of things to highlight from the team at Global Research.
Speaker: There's some good news on China where our team sees a brighter outlook for growth.
Speaker: Although weakness in the property sector remains, consumption is underpinning the recovery, with services-led retail activity rising by nearly 20% so far this year.
Speaker: Beijing is also taking a more proactive stance and ramping up fiscal policy.
Speaker: Jinglu, our chief economist for Greater China, now sees growth of 5.2% this year and 4.9% in 2024.
Speaker: Turning to technology, Helen Fang, our Head of Industrials Research in Asia-Pacific, has been looking at the role that surgical robots could play in the healthcare industry.
Speaker: Helen says that demand for higher quality healthcare will drive rapid growth in surgical robots in the coming years.
Speaker: Her report looks at the robots on the market and in development and assesses the revenue opportunities for the manufacturers.
Speaker: For more information on those reports or our views on the UK that we talked about earlier, please email askresearch at hsbc.com.
Speaker: So that wraps things up for another week.
Speaker: Thanks very much for listening.
Speaker: We'll be back next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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