It was a plentifully leaked and pretty much as expected ‘steady as she goes’ Autumn Statement today but it was a far more upbeat update on the public finances than any Chancellor has had the pleasure of delivering over the last six years or so. Indeed, as Chancellor George Osborne wasted no time in pointing out, it was the largest upward revision to official economic forecasts in 14 years.

 

The independent Office for Budget Responsibility significantly revised up its projections for growth in 2013 but surprisingly assumes the pace of growth will ease moving into 2014. While the OBR uprated their GDP growth forecast for this year to 1.4% (from 0.6% in March) and increased its 2014 forecast to 2.4% (from 1.8%), in its quarterly profile it assumes the rate of UK growth will decelerate to 0.7% in the final quarter of 2013 and hold steady at 0.5% in 2014.

 

The expected short term deceleration is surprising in the context of buoyant business surveys such as the ICAEW/Grant Thornton Business Confidence Monitor which showed the fifth successive rise in business confidence in Q4 2013, on the face of it pointing to quarterly growth in excess of 1%. If this is reflected in the Office for National Statistics data the Chancellor could be in a position to announce a further upgrade to growth forecasts in March 2014 and an additional improvement in the state of the public finances.

 

Looking further ahead, we are in broad agreement with the OBR’s assessment that growth will fall back in 2015 in the face of further fiscal tightening but are concerned that the longer term outlook is loaded with strongly optimistic assumptions around the expansion in business investment and earnings growth running close to 4% to support strong gains in household consumption. How earnings evolve is going to be crucial to deciding the lively political debate on living standards and the cost of living.

 

Real GDP annual percentage growth, OBR forecast against Cebr

forecasts

Our latest analysis in the Asda Income Tracker shows household discretionary spending power is flat compared to a year earlier while the YouGov/Cebr Consumer Confidence Index looks to have started to plateau. Translating the improved macroeconomic performance into palpable gains for average households shaped some of the tinkering that the Chancellor introduced today including the cancellation of the planned fuel duty increase and lowering  the increase in rail fares. However, the real game-changer will come if higher economic activity  translates into higher pay – we think this should start to come through in 2014 but are no means as optimistic as the OBR about the acceleration.

 

 Please contact Charles Davis, Associate Director at Cebr, if you have any queries: cdavis@cebr.com or 020 7324 2863