UK's economy is on course for additional fiscal spending – Rabobank

Analysts at Rabobank suggests that there may not be too many common threads between the UK’s political parties, but it appears that irrespective of the results of the December 12 election, the UK economy is on course for additional fiscal spending.

• “According to a report published earlier this week by the Resolution Foundation think-tank, UK government spending could be on course to return to levels last seen in the 1970s (relative to GDP) under either a Labour of Tory government.
• The Institute of Fiscal Studies has this week warned that there was little room for election giveaway if the parties wanted to keep within the current spending rules that state that borrowing should be below 2% of national income. Chancellor Javid has already pledged to borrow more to take advantage of current record low borrowing rates and today has indicated that a Tory government would increase this ceiling to 3% of GDP.
• Given the current headwinds stemming from the slowdown in global growth and the softening in levels of activity in the UK, this could prove to be a brave assumption.
• Insofar at the Labour party, LibDems and the Greens are all pledging to increase borrowing if they had election success, the implications for the UK budget are clear. It may also be assumed that the need for further rate cuts from the BoE will be lessened if spending is increased.
• Having risen 6% or so in October, GBP/USD has subsequently held on to most of its gains based on boosted expectations for a smooth Brexit.
• In our view there is risk that fears of a disorderly Brexit could re-emerge if trade talks between a Tory government and the EU next year prove difficult. This would raise the risk of the UK crashing out of the EU at the end of the transition phase at the end of 2020. Clearly this would re-open downside risk for the pound.”