Budget: Gloomy outlook for economy sparks living standards concern

The UK economy is set for a three-year slowdown with potentially negative impacts on DB pension funding and earnings growth likely to falter say experts.

Macro economists have given a downbeat response to the projections for the UK economy published by the Office for Budget Responsibility (OBR) alongside yesterday’s Budget documents, with several blaming Brexit uncertainty for the slowdown and highlighting it as the key risk facing the UK. Positive predictions for the UK’s economic outlook were scarce in the wake of the Chancellor’s Budget speech.

The OBR says the economy will slow down for the next three years, with 2017 growth forecast to be 1.5 per cent, and falling to 1.4 per cent in 2018, 1.3 per cent in both 2019 and 2020 before rising to 1.5 per cent in 2021 and 1.6 per cent in 2022.

Pensions experts say the gloomy economic outlook spells bad news for companies burdened with defined benefit pension schemes, and say the move to link business rates to CPI rather than RPI could encourage some sponsors to push for schemes to do the same.

IFS Paul Johnson says: “The person making the news yesterday was not the chancellor, it was the chairman of the Office for Budget Responsibility (OBR), Robert Chote. Mr Chote and his colleagues finally lost patience with their own continued overoptimism on productivity growth and delivered a pretty grim set of forecasts. They no longer see productivity growth climbing towards its pre-crisis levels. They foresee economic growth struggling up to only 1.6 per cent a year by the early 2020s rather than the 2 per cent they had previously forecast.

“If Mr Chote and colleagues are right, and low growth continues, then gloom should not be confined to the Treasury. On the new forecasts, real earnings growth will be almost non-existent for the next two years, and horribly weak thereafter. We will all have to get used to the idea that steadily rising living standards may be a thing of the increasingly distant past.”

Society of Pension Professionals president and director at Spence & Partners Hugh Nolan says: “The expected slowdown in economic growth is bad news for companies still struggling to pay for historic benefit promises. The move to link business rates to CPI rather than RPI reinforces the argument for DB schemes, accidentally stuck with the outdated measure, to switch to the cheaper modern standard.”

Professor Peter Urwin, director of the Centre for Employment Research and Professor of Applied Economics at Westminster Business School says: “Philip Hammond shares Mark Carney’s view that a Brexit hit will come and, like Carney, the Chancellor wants something in the armoury. The Bank of England raised interest rates on 2 November, so that lowering them is an option in a subsequent downturn. Likewise, Philip Hammond kept a tight rein on the purse strings because he also needs room for manoeuvre when the Brexit hit comes. The £3bn pledged for Brexit preparations was the most visible sign, but even without that, this Budget is all about Brexit, and preparations for the recession it is increasingly likely to bring.”

Investec Wealth & Investment bond strategist Shilen Shah says: “Brexit remains the key area of uncertainty for both GDP growth and the budget deficit, with the key unknown being whether a comprehensive deal can be achieved in both the goods and service sectors. In anticipation of costs associated with new a relationship with the EU, the government confirmed that it had already spent £750m on Brexit preparations, with a further £3bn set aside. The key risk for the economy however remains whether a service sector agreement can be reached, given that it makes up more than 80 per cent of the economy and its one area of trade where the UK has a surplus with the EU –in contrast to the manufacturing sector.”

State Street Global Markets global head of macro strategy Michael Metcalfe says: “The Government has committed funds to help with the preparation for Brexit contingency planning, but the real challenge for UK markets revealed in the budget came from the Office for Budget Responsibility (OBR) and the significant downgrades to the UK growth outlook. Still high inflation and an expected weakening in growth provide a potentially troubling backdrop for markets even without the political uncertainties created by Brexit.”