UK bonds and shares welcome pre-election budget as growth forecasts nudged up, says Stewart Robertson.

March 2015

Key points

  • Chancellor targets savers rather than spenders in pre-election budget.
  • Ten-year gilt yields hit five-week low as Osborne predicts less insurance in 2015/16.
  • UK Shares leap as economic growth forecasts are lifted.

Gilt prices climbed as Chancellor of the Exchequer George Osborne said the government would need to sell less debt than forecast in the next financial year as government finances improve. Ten-year yields fell to their lowest in five weeks as Osborne said the government plans to sell £133.4 billion of bonds in the year to April 2016, nearly £12 billion less than the market had expected. Issuance will be skewed towards debt with longer maturities. Osborne resisted the temptation to make this too much of a give-away budget ahead of May’s general election.

UK equities rose appreciably in response to Osborne’s remarks, most notably his forecasts for stronger economic growth. More generous tax-free personal allowances, including the introduction of a personal-savings allowance, illustrated that this was very much a savers’ budget.

In terms of its likely impact on the economy, it appears the budget was largely neutral with lower inflation and higher tax receipts together helping pay for a smaller cut in public spending than previously envisaged. However, given the poor state of the UK’s finances austerity will be an issue whoever wins the election. But growth has gathered sufficient momentum since 2013 that we doubt this will dent the recovery unduly.

Uncertainty around the outcome of May’s vote is a bigger concern for the economy. Opinion polls suggest a tight contest. The result could well dictate the pace at which public sector spending is cut. More important still, it could lead to a referendum on the UK’s continued membership of the EU.

While financial markets may become increasingly volatile ahead of the election, the budget does little to alter our upbeat assessment of the prospects for the economy. The UK is set to grow 2.6 per cent in 2015, in line with last year, outperforming most other developed economies. While sharply weaker energy costs are likely to dampen inflation in coming months, we expect the Bank of England to raise rates in November as real wages and employment rise.

While the prospect of a hike in US rates this summer tempers our enthusiasm for equities and other risk assets, once the uncertainty around the general election subsides, prospects for UK stocks are encouraging. Company earnings are recovering, consumers are spending more and aggressive ‘quantitative easing’ in the euro zone is lifting the economic prospects of the UK’s largest trading partner.