Silver linings in the Spring Statement?

UK economic growth prospects may look anaemic but there were glimmers of positivity in the government’s Spring Statement. Although the Office for Business Responsibility (OBR) downgraded expected growth from 2% to 1% for this year, it had glimmers of positive news elsewhere. For one, OBR scored the government’s planning reforms positively. It also estimates disposable income may grow at almost twice the rate than expected in the autumn.

But with inflation still above the 2% Bank of England (BoE) target, what does it mean for interest rate expectations?

Hetal Mehta, Head of Economic Research at SJP, says: “Seeing as the overall tax and spend (fiscal) package was relatively small in size and government borrowing was only nudged up slightly, there should be little direct impact on the BoE’s decision-making. Weak growth will likely allow for modest rate cuts this year, but elevated inflation will temper the pace.”

As anticipated, the Chancellor favoured spending cuts over tax changes. Constrained by the UK’s fiscal rules, Hetal says: “we expected the Chancellor to keep the purse strings relatively tight and not provide much fiscal boost to growth. She is somewhat boxed in with few levers that can be pulled without policy u-turns or breaking previous pledges.” As a consequence, the “tax burden” is set to remain at historically high levels, she notes.

Colloquially known as the “tax burden” chart, Hetal notes there has been little change.

Although the OBR halved UK growth expectations for 2025, a recession this year would be unexpected, Hetal says. However, stagflation remains a concern. Stagflation, much associated with the 1970s, is when an economy faces slow growth as well as high inflation and unemployment. Inflation news out on the morning of the Spring Statement did show inflation slightly lower than expected – 2.8%. But as Hetal points out, it’s not that straightforward. Inflation is still above target and within services it has remained relatively high at 5%. Still, Hetal notes labour market data continues to show good levels of employment.

UK investors

One area of well-trailed change was the increased spending on defence. A boost of £2.2bn will be targeted at local manufacturing with Reeves stating the UK should be a defence superpower. She highlighted a minimum of 10% of the Ministry of Defence’s equipment budget will be spent on new technologies such as drones and AI-enabled technology. The sectors and companies this will impact remain to be seen.

Justin Onuekwusi, Chief Investment Officer at SJP, currently favours the UK stock market and the Spring Statement has not changed that view. The UK stock market, biased towards larger, value-oriented companies and industries, tends to perform relatively well in volatile markets. This, plus relatively cheap valuations, means UK equities look attractive, in Justin’s opinion.

Having experienced some volatility at the start of the year over concerns stemming from the UK autumn budget, the UK government debt market – Gilts – was closely watched. Ten-year Gilt yields ended up roughly unchanged (4.7%) in the immediate aftermath. SJP fixed income specialists believe the government’s announcements do not merit a material change in yields. Any structural changes in fiscal policy are likely to affect UK growth dynamics with very long lags, they say.

Global landscape

As dim as the UK’s economic prospects may seem, the lack of drama may be a positive. Hetal points out global rifts, US actions (and inactions), tariffs and changing trade partners have dominated global news. She adds: “The current level of uncertainty from the US is extreme, particularly regarding trade policy. Except for the pandemic era, uncertainty surrounding fiscal policy is at its highest since levels witnessed during the 2011 debt ceiling crisis.”

While the global news landscape has served to rattle some investors, it may also divert them from concerns over the state of the UK’s economy. Also overshadowing recent UK economic news has been the major stimulus announcements from Germany – the largest by the country in a generation Hetal points out. Its’ significance should not be underestimated she says, noting it could overturn the economic divergence between the US and Europe.

SJP Approved 26/03/2025