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The Budget announcement reigns supreme in UK economic news as we near Wednesday, and although Libya and Japan are in the World’s sights it is important to assess and understand the impact of the coming Budget on the UK economy.  You would be forgiven for expecting the worst after the introduction of tax rises and spending cuts since the coalition came to power in May. David Cameron has promised us that it will be the ‘most pro-growth budget in a generation’ while Osborne speaks of moving from ‘rescue to recovery’. It would be unlikely that Osborne would change the austerity plans, as the OBR forecasts the deficit falling from 10% of national output to 7.6% in the next financial year – thanks to the cuts put in place by the government.  He did say that there would be no further tax increases or spending cuts, but a dilution of the current cuts could damage Britain’s economic stability.

What the Budget could include is the cancellation of an increase in fuel duty, which was planned for April , and the planned inflation-linked increase on air passenger duty looks set to be scrapped as well. All good news for motorists and frequent-flyers, but what about growth? The markets must be respected so Osborne won’t throw out any wild ideas, the ones we are aware of include the millions which will be spent on creating enterprise zones. As well as the cash raised from the levy on banks going towards work placements and apprenticeships in an effort to cut youth unemployment.  Osborne also plans to tighten a loophole allowing masses of traders to sell goods over the internet free of VAT, and sending the cheap goods to the Channel Islands.

Markit revealed the outcome of its household finance index survey this morning, which measures the change in a family’s financial situation compared to the month before. The news was not impressive, with the figure falling to 35.2 in March from 35.6 in February. The expectation of the households’ finances in a year’s time saw a drop to 34.2, a record low. This will do little to deflect concerns over the strength of the UK economic recovery and comes at a bad time with the approaching budget.  

 Jeremy’s Trade of the Week

This week’s trade of the week is a simple forward. In keeping with our view that euro should weaken against the pound over the coming months we would take advantage of the near 6 month lows in the pair and advise clients who sell euros  and buy sterling to hedge via a forward contract. A typical price at the time of writing on a 6 month forward is 1.1555, saving the client over 7 cents against our 6 month prediction of 1.23 for the pair.

Obviously forward contracts are available for other currency pairs and for further info please contact one of the traders on 020 7801 9050.