ALEX BRUMMER: Growth springs a surprise


Four months have passed since Philip Hammond delivered a sober Autumn Budget peppered with gloomy forecasts from the Office for Budget Responsibility (OBR).

If ‘Spreadsheet Phil’ feels like lifting clouds of despondency, partly created by Treasury mandarins, he will have the opportunity next Wednesday when he delivers his spring statement.

The Chancellor pledges a scaled back affair rather than the shed-load of new policies favoured by predecessors Gordon Brown, Alistair Darling and George Osborne. 

But most politicians would find it difficult not to lift the mood with a sprinkle of stardust.

Say it quietly, but the Chancellor does have cash behind the clock for smoothing Brexit, boosting the NHS and Tory tax cuts

Say it quietly, but the Chancellor does have cash behind the clock for smoothing Brexit, boosting the NHS and Tory tax cuts

Say it quietly, but the Chancellor does have cash behind the clock for smoothing Brexit, boosting the NHS and Tory tax cuts

In a very short time-frame, the economic and fiscal outlook has improved sharply. Indeed, if the goal posts can shift so quickly, it is a reminder that leaked Treasury estimates on the impact of Brexit on the nation and the regions are likely to be unreliable. 

You don’t have to be a believer in the merits of leaving the European Union to think this.

An authoritative report by three Remainer Cambridge economists at the university’s Centre for Business Research fundamentally challenges forecasts made by HM Treasury, the OBR and the OECD. 

It argues that many of the assumptions fed into forecasting models are faulty, with the possible exception of the London School of Economics approach.

One should be cautious about short-term data, but improvements seen since November are remarkable. 

The latest numbers for manufacturing output show production up for an unprecedented ninth month in succession, with capital goods and electronics leading the charge.

Exports are at record levels, as might be expected following sterling’s post-referendum depreciation. But so are imports from the EU.

That might not seem a good thing but it illustrates why Brussels should not allow Britain to fall off a cliff edge.

In the autumn, the OBR made a series of poor assumptions about the UK’s perceived appalling productivity. 

The timing of its big downgrade, which fed into growth forecasts and the health of the public finances, was peculiarly premature.

Output per hour jumped 0.8 per cent in the final quarter of 2017 and has now experienced its best two consecutive quarters since the financial crisis. 

Moreover, with unemployment at record low levels and the flow of overseas workers becalmed by Brexit, the long-awaited uptick in business investment may start to materialise.

The Cambridge economists suggest that the Bank of England agents have overdone the impact of business uncertainty in their forecasting and the economic impact ‘is shown to have been weak’.

What is indisputable is that Hammond has a better borrowing story to tell.

In November, the OBR lowered the budget deficit forecast for this year from £58billion to £50billion. 

Overkill: The Cambridge economists suggest that the Bank of England agents have overdone the impact of business uncertainty in their forecasting

Overkill: The Cambridge economists suggest that the Bank of England agents have overdone the impact of business uncertainty in their forecasting

Overkill: The Cambridge economists suggest that the Bank of England agents have overdone the impact of business uncertainty in their forecasting

The Institute for Fiscal Studies says it will come in below £46billion and could possibly hit £41billion, which would mean the current budget is back in surplus for the first time since Brown was at the Treasury in 2000/01.

Drivers for lower borrowing are strong revenues, with cuts in corporation tax delivering higher receipts. This represents a repudiation of Labour’s plans to reverse Osborne’s radical corporate tax cuts.

The Tory’s tight grip on spending has also made a big difference. There is no room for complacency. Borrowing has been savaged and is negligible compared to 10 per cent of national income in the aftermath of the financial crisis.

But at 86 per cent of output, public debt is at its highest level since the mid-1960s.

So there is a way to go. Say it quietly, but the Chancellor does have cash behind the clock for smoothing Brexit, boosting the NHS and Tory tax cuts.

GKN escape route

After several long sessions of negotiations, GKN has secured a white knight in the shape of American drive-shaft maker Dana.

GKN investors will own 47.5 per cent of a new UK domiciled group, along with two GKN non-executives and a New York Stock Exchange quote. GKN’s pension fund is rendered safe and, with support from Whitehall, e-drive and innovation could be secured.

Shareholders have a clear choice. They can support a new structure which gives clarity to the intrinsic value in car components and aerospace, or opt for the unknowns of a Melrose break-up.

A deal with Dana is not ideal. But it avoids embarrassment to Government and UK long-term investors over obscene payouts of up to £285million to the Melrose three – Chris Miller, Simon Peckham and Tory donor David Roper. Phew.

 



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