Submitted by the Strategist Macro Blog
The delta on Chancellor Sajid Javid’s 2020-21 government spending review, announced today, is from 1% real shrinking to 4% real growth; so a 5% real delta in government spending; x 38.5% spending/ GDP, so that’s almost a 2% of GDP continuous fiscal boost.
Between economic recovery and austerity government spending had shrank by 6.4% of GDP.
Next year the fiscal boost could get GDP into the 2-3% range for several years, possibly higher, notwithstanding a further slowdown into year end.
As I have written up previously, UK business investment has also been very constrained since 2015, so a rebound could also add to growth.
An increase in house building and business investment combined could add perhaps another 4 or 5% to GDP in total over the course of several years.
Any shrinking of the goods deficit with the EU, which has been 5% of GDP/ £100bn, would also add to the growth. In Q1 we saw stocking ahead of Brexit, which reversed in Q2, but it looks like the overall trend might be improving. More business investment to boost output would shrink the goods deficit and WTO tariffs would help domestic producers.
We will need the household savings rate to go up with wage rises, however, otherwise inflation could start to rise.
I see this as a very similar path as the one Trump is following with MAGA economics; grow revenues (GDP) while keeping debt costs low/ fixed. I nicknamed that the LBO Whitehouse.
Overall, we could see a little boom after Brexit and it should be led by investment rather than private sector credit.
If we get a further sell off of GBP into a likely WTO Brexit ($1.15/ €0.95 rough lows?) and a general risk off phase in global markets, followed by policy accommodation, data stabilisation and within the UK a landslide Boris election victory, it could set UK assets up for a nice entry point towards year end – as long as the US avoids a recession.
While headline assets like Gilts, FTSE100, prime real estate are not cheap, there is value to be found away from that, if you look for it.