Hunting for Stability
The £55bn Autumn Statement outlines tough times ahead
What a whopper.
More like a full budget than brief update on the fiscal plan.
If there was any doubt that elements of Liz Truss and Kwasi Kwarteng’s vision might still have some legs, the nail was firmly hammered into the coffin yesterday by the new Chancellor of the Exchequer, Jeremy Hunt.
One word I’ve heard Hunt say repeatedly during his first month as Chancellor was ‘stability’. I think we would all appreciate a serving of this after three prime ministers, four chancellors, three home secretaries and the infamous Liz & Kwasi mini-budget in recent months. And his speech didn’t disappoint, with stability being the first of three priorities, along with growth and public services, plus his positioning of inflation as the ‘enemy of stability’.
Gone are the tax cuts and policies helping the highest earners. We’re back to spending cuts and tax rises (for everyone). Interestingly, I was at the WPA Annual Lunch yesterday and heard Ed Balls speak about a I’m a Celebrity, Strictly and… consensus. He spoke of not just cross-party consensus, but a more wide-spread consensus. An acknowledgement that this tough approach - the polar opposite to Kwarteng’s - is needed and despite being very painful is welcomed for the clarity it brings.
Less than two months ago, during those crazy few days of market turmoil, I wrote about rising interest rates and borrowing to fund Kwarteng’s tax cuts. So does this U-turn on fiscal policy mean we’re going to see interest rates coming down? I don’t think the short term picture has really changed that much - we’re still in for pain as interest rates head up and to the right1 to combat stubbornly high inflation2. Hunt might argue that his plan leads us to future growth which “further reduces the pressure on the Bank to raise interest rates”, but this is a longer term vision.
What we do have though, is more answers.
The key thing that has changed, is how the government funds their future plans with the hope of pushing us out the other side into a period of growth. Kwarteng was borrowing and couldn’t explain how this would be paid back in the future, whereas Hunt wants to diligently balance the books now with spending cuts and higher taxes. Of course, Hunt faces a conundrum in that inflation, high energy prices and interest rates are already hurting the economy, so he is trying to somehow give with one hand (help with energy bills), but take with the other (tax rises). I’m sure it feels like mostly taking!
Like I said in September, “development appraisals are going to feel the pinch, even more so if using finance or external funding, as the cost of capital increases. Savings will need to be found. Get ready for some VE meetings!”
I still believe well financed developers should be able to look through this downturn and play the long game, with their sights on opportunity, good rents and demand for quality space in the mid to long-term. But 2023 looks like a challenging year under the gloomy skies of a recession. The OBR’s Economic and fiscal outlook report (the missing part of Kwarteng’s plan) suggests the economy will shrink by 1.4% in 2023, however an optimist might focus on a return to growth 1.3% in 2024. Yesterday Hunt told us we are already in a recession and based on the OBR figures it seems BoE boss, Andrew Bailey, may be on the money with his recent warning of a two-year slump.
In construction, I already see signs of the market slowing, with predictions for output in 2023 now firmly in negative territory (CPA predicting -3.9%). Housing and commercial are cited as two sectors that will suffer, whereas infrastructure is expected to continue growing, albeit at a reduced rate. The CPA actually mentions Net Zero and energy-efficiency as critical aspects of the industry that the government must focus on if they are to combat falling output.
If there was a winner yesterday, infrastructure projects might be it. Levelling up round two, HS2 (LDN-MCR), Northern Powerhouse Rail and Sizewell C all survived. And perhaps another small winner (in the future) is business rates, which will benefit from cuts, but only after the 2023 revaluation has gone ahead as previously planned.
Hold on tight as the wild ride of the 2020's rollercoaster isn’t over yet, and it probably has a few more twists and turns ahead.