UK Government Deficit Falls

January 29, 2018

UK Government Deficit Falls

The UK government deficit fell more than expected for the financial year to December 2017. Public sector net borrowing fell by £6.6bn to £50bn, making it the lowest level since 2007. The ONS have had to make several adjustments to its expectations so far this year as tax receipts came in stronger than anticipated. Following release last week of the final quarter GDP growth at 0.5%, it is clear the more resilient economy has supported the improvement in public finances. While it is expected that there will not be a government spending windfall as a result of the improvement, it may well lead to some more populist policies being funded during future budget decisions. Importantly, the increase in GDP and reduction in net borrowing will support the movement towards reducing the government debt to GDP figure that is a key measure of a government’s ability to spend going forward.

UK Employment Grows

More positive news came out for the UK economy last week, as ONS figures showed that there was an increase of 102,000 people in employment over the three months to November on the preceding three months. Furthermore, the employment rate (the proportion of people aged from 16 to 64 who were in work) increased to 75.3%, making it the joint highest since 1971. The low unemployment rate of 4.3% and high employment rate indicate that there is very little slack remaining in the jobs market and with average earnings now beginning to accelerate, the potential for wage inflation over the coming year is now more prevalent. This will come as positive news for many who have been experiencing negative real wage growth.

US Dollar weakens

As a result of increased tariffs on foreign goods imported into the US and comments made at the Davos World Economic Forum, the trade-weighted US dollar fell by over 1.5%. The move resulted in the Sterling moving to its highest rate against the US dollar since the Brexit referendum. The US government announced significant increases in tariffs on washing machines and solar panels along with a warning of more come. This has been billed as a direct attack on what Donald Trump has highlighted as unfair trade practices from export-led countries such as China and South Korea. The threat of a trade war has increased although it is more likely that the US government are using these measures to bring about negotiations to new trade deals which will be beneficial to US interests. Some analysts are predicting a sustained weakening of the dollar, however, with the anticipated interest rate rises and strong economic growth will make this difficult to achieve.

Market Data

Index Open Close Change % Change
FTSE 100 7730 7665 -65 -0.84%
S&P 500 2798 2872 74 2.64%
Dax 13434 13340 -94 -0.70%
Cac 40 5526 5529 3 0.05%
Nikkei 225 23816 23631 -185 -0.78%
UK 10 Year Gilt Yield 1.34 1.46 0.12 8.96%