Barclays on the UK budget - asymmetric risk for GBP (skewed to downside)
This preview of what is coming up from the UK today - bolding mine
UK Chancellor Hammond will release the 2018 Budget on Wednesday, and we think that GBP risk is skewed to the downside.
- The OBR is likely to lower its GDP growth forecasts based on an assumption of slower productivity growth over the next four years.
The gap between OBR and BoE productivity growth assumptions has been significant for some time, with average growth rates of 1.60% and 1.25% y/y, respectively, between 2018 and 2020.
- While it is possible that the OBR will persist with this optimistic view, we do not think that this augurs for GBP appreciation.
Output per UK worker continues to disappoint and suggests that a downward revision is appropriate.
- The associated lower income over the forecast period should result in higher government net borrowing forecasts between 2018 and 2022 but Chancellor Hammond has promised to continue targeting a structural fiscal deficit below 2% in the 2020/21 fiscal year even if economic circumstances change (we expect a forecast of 1.5% ...)
This target, however, introduces a worrying scenario for GBP if the OBR delivers more sizeable downward revisions to its GDP growth forecasts and the government is forced to reduce spending in order for the target to be met. Fiscal austerity at a time when the BoE is encouraging market expectations of rate hikes could leave the currency isolated and GBP depreciation the only release valve for the economy to stabilize.