The UK Budget – growth down, gilt issuance up.

Once a year I head down to the Embankment, opposite the Houses of Parliament, to try to film a comment on the UK Budget whilst being heckled by wild eyed men drinking Kestrel Super, and pestered by packs of Italian students mistaking me for Brad Pitt making a movie about a tired fund manager in an ill-fitting suit.  Here’s this year’s Budget film.  If it sounds like I don’t think that the government are doing a great job on the economy, that would be a fair analysis.  But for what it’s worth if we’d ended up with a Labour-LibDem coalition instead I doubt we’d have a AAA credit rating or the stable currency that we have right now.  On the other hand we might well not be looking at the collapse in UK growth expectations that we’re experiencing (the OECD expects just 1.5% UK GDP for 2011), and over the medium term it’s growth that delivers lower budget deficits.

Coupled with Tuesday’s 5.5% RPI inflation print, there’s talk of stagflation again.  Certainly there’s enough baked in the cake to make 2011 a very inflationary year, and along with a big fall in February’s retail sales announced this morning came the news that shop prices are rising at their highest rate since 2008.  We expect however that 2012 will be a year where inflation moderates, as the VAT hike drops out of the numbers and as below trend growth and high unemployment rates restrict demand.

(Latest news:  Moody’s: “Although the weaker economic growth prospects in 2011 and 2012 do not directly cast doubt on the UK’s sovereign rating level, we believe that slower growth combined with weaker-than-expected fiscal consolidation could cause the UK’s debt metrics to deteriorate to a point that would be inconsistent with a AAA rating”.  Oh dear – rubbish growth and  we lose the AAA…)