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24th November 2016
Copia’s macro observations from the UK Autumn Statement
UK Autumn Statement: the big picture
• Cut to 2017 growth rate a concern
• Inflation uptick looks too low
• Focus on infrastructure and innovation is welcome
Growth, inflation (and therefore interest rates) are key variables for the UK market and are included in the large number of global variables that are processed by our quantitative model. So, what does today’s Autumn Statement mean for these key variables?
UK Growth expectations
The Chancellor’s Autumn Statement reveals downgrade to UK GDP expected growth rate relative to pre-referendum expectations, reducing 2017E from 2.2% to 1.4% and to 2018E from 2.1% to 1.7%.
UK Inflation
UK inflation expectations were increased from 1.6% to 2.3% 2017E and 2.0% to 2.5% 2018E. These increases look too low relative to market-implied inflation expectations of 2.4% and 2.8% for 2017E and 2018E respectively. Implied inflation rates are derived from the difference in conventional and inflation linked government bond swaps known as the “swap break-even rate”.
UK Interest Rates
Raised inflation expectations are putting upward pressure on Bank Rates evidenced by a steepening of the short end of the UK yield curve.
Source: Copia, Bloomberg
Why are these variables important?
Short-term growth, inflation and interest rate data are some of the many global data points that are captured and processed by our quantitative model to derive expected returns and to generate the Risk Barometer score that determines all our portfolios’ tactical positioning.
Long-term expectations around growth, inflation and interest rates for each major market are key to the capital market assumptions used when setting the strategic asset allocation of our Select range.
Sources:
http://cdn.budgetresponsibility.org.uk/March2016EFO.pdf
https://www.gov.uk/government/publications/autumn-statement-2016-documents/autumn-statement-2016