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As recently as a month ago, the U.K. budget set to be unveiled Wednesday was seen as a chance for the new Boris Johnson-led Conservative government to stamp his vision of how a post-Brexit Britain might look.
How quickly things change.
After forcing Sajid Javid out last month as Chancellor, Johnson is turning to relative neophyte Rishi Sunak to deliver a budget that may be limited in its ambitions. In any case, the raging coronavirus that has paralyzed China and Italy and infected at least 321 people in the U.K. is set to cast a large shadow over whatever Sunak unveils at the budget scheduled for 12:30 p.m. local time, or 8:30 a.m Eastern.
One possible surprise would be if the Bank of England were to coordinate an interest-rate cut alongside the budget, though most analysts believe the U.K. central bank will wait until its March 26 to reduce interest rates from its current 0.75% level.
Here’s what various firms are saying:
• Citi: “With Sajid Javid’s departure, there is now a clear risk the government breaks with its fiscal framework on 11th March – especially in the context of growing coronavirus concerns. On balance, we think the government is more likely to take a cautious approach. We expect the government to stick to the electoral fiscal framework – limiting major announcements to investment.”
• Deutsche Bank: “On spending, we see Chancellor Sunak sticking broadly to policies already announced by his predecessor. We also expect additional cash allocated to the NHS, tax relief and liquidity measures to help SMEs and households weather the impact of the coronavirus crisis. We see upside to this with Sunak possibly opting for additional stimulus. Our main assumption, however, is that the Chancellor sticks implicitly to the fiscal rules next week.”
• Nomura: ““We can expect a coordinated response from the Treasury and the Bank of England on Wednesday, the Treasury providing fiscal loosening to support businesses, households and the economy more generally, while the Bank of England crafts both a targeted and more generic monetary response. We expect the Bank to announce some kind of liquidity support and a 25bp rate cut in March, and we would assign a 60% probability to the latter happening at the same time as the budget. If not, then we think a rate cut would still be delivered, but instead at the MPC’s scheduled meeting on 26 March.”
• Pantheon Macroeconomics: “We expect the Chancellor to plan for public borrowing to rise to 2.4% of GDP in 2020/21, from 2.0% this year. Mr. Sunak must be fairly cautious, as the economic forecasts won’t include the looming coronavirus hit. He also has a strong incentive to get any tax increases completed well before the next general election, and to save his firepower for 2021, when the government will be desperate to show that Brexit has been an economic success. Mr. Sunak must, however, release funds for government agencies to fight the virus; we expect around £2.0B—0.1% of GDP—to be signed off for virus-related contingencies.”
• Royal Bank of Canada: “We estimate that gross Gilt issuance will rise to £177.2bn in 2020-21, an increase of just over £40bn compared to 2019-20. This increase implies net Gilt issuance for 2020-21 of £79.6bn, the highest level since 2013-14. Given that the expected increase in government spending has been well flagged, we expect the Budget to play second fiddle to coronavirus-related newsflow. Unless the Budget differs substantially from expectations, we do not anticipate a strong market reaction.”
Societe Generale: “Johnson readily acknowledges that he owes his election success in large part to his demolition of the ‘red wall’ of Labour voters in the midlands and the north of England who felt strongly about Brexit but who also felt ‘left behind’ by the prosperity in the south of the country. The quid pro quo, as Johnson sees it, is to pour money into the region to improve the economy there. One way of doing this is by modifying criteria for assessing investment projects – the idea being that the current criteria favour the south.”
Over the past month, the yield on the U.K. benchmark 10-year gilt TMBMKGB-10Y, 0.238% has dropped by around 40 basis points on concerns that the virus will limit growth.
The British pound GBPUSD, -1.64% has been fairly stable, reflecting expectations the U.S. Federal Reserve will cut interest rates more than the Bank of England can.
The FTSE 100 UKX, -0.09% index of top U.K. companies has slumped 21% over the last month, in line with the declines in most global stock markets.
