Autumn Statement Reaction: Has Osborne done enough to shield UK?

As George Osborne reveals the Office for Budget Responsibility has revised down growth forecasts in the UK and government borrowing is moved higher, fund managers and economists give their view on 2011's Autumn Statement.

Alan Wilde, head of fixed income and currency at Barings.

"With revised GDP growth estimates of 0.9% for 2011 and just 0.7% for 2012, we believe the UK's burden of debt will continue to increase from here, with the risks very clearly on the downside.

"Weak growth in Europe is now a given, but there is a widespread perception the deflationary policies pursued by the government have contributed to this sorry state of affairs, with the UK economy likely to expand by less than many of our continental neighbours this year.

"Decisions over policy are often as much political as economic, and the fiscal squeeze in the UK is only possible because of monetary largesse, in the form of quantitative easing from the Bank of England. The city is complacent yet comfortable with this approach as it makes gilt sales easier when you have a large buyer. However, there is now a real risk that quantitative easing continues indefinitely, weakening sterling and raising inflation.

"The real test will come when the situation in the eurozone begins to stabilise, and overseas investors look at the prospective returns from a gilt market yielding a little over 2%. That is likely to be more than a little challenging for the gilt market.

"The short-term gain of cheap refinancing will not be here indefinitely. We believe that the Chancellor should be borrowing hand-over-fist when the opportunity to lock-in these record low rates presents itself. After all, it's not an opportunity that is likely to present itself again in the forseeable future."

Richard Jeffrey, CIO at Cazenove

"The forecasts from the OBR acknowledge the disappointing truth - that, in the near term, growth will undershoot previous projections. It is anticipated this year's unprecedented squeeze on household spending power will diminish in 2012 and household consumption will return to a rising path in real terms.

"In our view, the increase in consumption could be stronger than is currently being forecast by the OBR. Whether this leads to a higher overall growth rate in GDP will depend on the contribution from other elements of aggregate demand, in particular net trade.

"The slower reduction in the borrowing requirement and the higher debt ratio reflect a realisation that a greater proportion of the public sector deficit is structural (as opposed to cyclical) than was previously estimated. We believe deficit reduction could eventually come through at a faster pace than the OBR is anticipating.

"While a stringent deficit reduction strategy was and remains vital - and has contributed to the UK being able to enjoy exceptionally low long-term borrowing rates, which benefit not just government but also the private sector, we believe previous plans ,announced by both this government and the previous Labour administration, have relied too heavily on additional revenue raising.

"It will take time for many of the measures to have a meaningful impact on growth, and in the meantime, the UK will be subject to significantly more adverse trends in economies in the eurozone.

"The initial reaction of the gilt market has been favourable, and that in itself is important - the worst outcome would have been a loss of confidence in the government's strategy."

Max King, multi-asset manager and global strategist at Investec

"I think everyone is being far too bearish on the UK. The downgrades of growth and gloom surrounding the borrowing are all becoming exaggerated. The Public Sector Borrowing Requirement (PSBR) is comfortably ahead of forecasts in cutting the deficit despite lower growth, and I think if growth ticks up the deficit will come down faster. There is too much pessimism on the deficit reduction.

"The squeeze on the UK consumer's disposable income due to higher inflation has had a significant effect on the economy but we think inflation will fall next year and the pressure on the consumer will ease.

"There has also been a marked improvement on the total current account, which suggests the economy is getting the re-balancing everyone said they want.

"We think the eventual outcome will be better than anyone expects and we will see economic growth pick up next year and the deficit coming down."

Simon Brazier, head of UK equities at Threadneedle

"The Autumn Statement did not hold any surprises but there were some interesting elements to the OBR report. We have always said government growth forecasts were too high and even though they have made some big changes, we still think they are too high. Our estimates for GDP growth in 2012 are zero whereas the OBR has forecast 0.7%.

"We also said the forecast savings ratio of 4% was too low and it has been raised to 6-7% per annum for the next four years and business investment growth will be a lot lower. The government has finally recognised these things which are important to a fund manager.

"However, despite the more negative economic outlook the forecast for UK borrowing has not gone up. They have assumed interest payments will be lower and they will save themselves £20bn through to 2015. This is assuming the UK economy can carry on issuing gilts at the 2% level.

"I am not suggesting this will not carry on but Osborne and the government has to massively hope global GDP growth remains positive as expected and the eurozone does not blow up - if either of those happen all bets are off."

Trevor Greetham, manager of Fidelity Multi Asset funds

"Public investment in infrastructure was a key focus in today's Autumn Statement but increases are being paid for by cuts to other budgets. With confidence weak and the outlook for exports darkening by the day it falls to the government to increase overall spending if we're to avoid another recession.

"The government argues that straying from its deficit reduction plans even in an emergency would result in a sharp rise in interest rates as we are seeing in Europe.

"However, the UK is not in the euro and it can print money to keep its interest rates low. It is telling that the US has made no effort to cut spending and Japan has more than twice the level of government debt in proportion to its economy but both governments can borrow at even lower rates."

Peter Hensman, global strategist at Newton 

"Despite the slowdown in the UK economy, the Chancellor argued the correct course was to do whatever was necessary to protect the UK from the global debt storm, not to increase borrowing to support short-term spending.

"While the downgrade to the OBR forecasts mean that government borrowing is expected to be £100bn higher over the next five years than predicted earlier in the year, the credibility of the government plan backed by the monetary intervention of the Bank of England meant, as Osborne will have hoped, the statement raised barely a flutter in the bond and currency markets.

"The attempts to offset this challenging outlook were largely as trailed in advance, with the Chancellor seeming to rattle through all of the projects expected to benefit from the £20bn pension fund backed infrastructure plan - including the Kettering bypass and Bristol link road.

"However, there was little sign of a substantial change to suggest this plan is dramatically different from "plan A" and the intention to keep UK government finances out of the market spotlight."

Ian Stewart, chief economist at Deloitte

"The Chancellor has reasserted the coalition's commitment to deficit reduction. Slower growth means slower progress in cutting the deficit. However, the political consensus within the coalition will reassure markets that have been unsettled by the political gridlock over deficit reduction in the US and by the huge uncertainties about the ability of euro area governments to manage and finance budget deficits.

"Second, the Chancellor has rightly targeted infrastructure investment and the financing of smaller businesses as areas where government action can help bolster prospects for growth. Given the scale of the risks posed by the euro debt crisis, the government is absolutely right to experiment with unconventional policies designed to address specific weaknesses.

"The need to safeguard credibility in fiscal policy gives the coalition no scope to pump prime the economy with spending increases or tax cuts. With fiscal policy constrained, the heavy lifting in terms of policy stimulus will come from the Bank of England. UK inflation should fall sharply next year, providing some respite to hard pressed consumers. Lower inflation is also likely to pave the way for further quantitative easing in 2012.

"Recent events highlight the linkages within the global economy. The euro debt crisis risks turning the UK's slow and faltering recovery into a recession. Decisions made in Berlin and Frankfurt over the coming months are likely to have a bigger impact on the UK outlook than those made in 11 Downing Street or Threadneedle Street".

Ian Kernohan, economist at RLAM

The 2011 Autumn Statement represents a significant alteration in the government's economic and political strategy. As recently as the summer, George Osborne expected to be on course to close the structural deficit by the end of this parliament and announce some pre-election tax cuts. A lot can happen between today and 2015, although that strategy now looks holed below the waterline and, politically speaking, we are already on 'Plan B'.

"The aim now will be to convince the electorate the coalition is best positioned to complete the deficit reduction plan and, at present, the electorate seems to trust the government more than the opposition.

"However, public opinion can be fragile and there are major risks ahead, with very little room for manoeuvre. If growth forecasts continue to disappoint relative to these downgraded expectations, at some point the OBR could call for further austerity in order to meet the government's fiscal rules. Such an event would be political dynamite and undermine the sense of political stability which the UK has enjoyed in the debt markets.

A decisive shift towards supply side growth policies (aka tax cuts), supported by many on the Conservative benches, would surely test the coalition to breaking point. Gilt markets seem oblivious to these issues, for the simple reason that while the situation in the UK may be bad, in many other countries it is either just as bad or even worse."

Ted Scott, UK market strategist at F&C

"The Chancellor is still rigidly sticking to ‘Plan A' aimed at reducing the UK's huge fiscal deficit, despite the deteriorating prospects for the economy which the government's austerity measures have exacerbated.

"The threat of recession and rising unemployment calls for a loosening of fiscal policy but, if this were conceded, there would be a risk the UK's credit rating would be downgraded, resulting in much higher borrowing costs for the government. The Chancellor has always maintained the government places a high priority on avoiding such a predicament.

"The prospects for economic growth have fallen sharply, as lower tax receipts suggest. The OBR has downgraded its GDP expectations for 2012 from an optimistic 2.5% to 0.7%; with the formidable headwinds of the Eurozone debt crisis and private sector de-leveraging to contend with, there is a real chance of a double dip recession next year.

"To counter the slower growth prospects, the Chancellor has announced some targeted policies especially towards small and medium-sized businesses. The objective of measures is partly to restore the movement of credit in the economy, the lack of which is acting as a constraint on growth. Their direct impact, however, will be limited in the context of a slowing economy with high and rising unemployment.

"The government will be hoping that the Eurozone, as the UK's largest trading partner, achieves a sustainable resolution to its debt crisis soon so that it will reverse its recent spiral towards seemingly inevitable recession.

"Without such good fortune, the Chancellor may be forced to think hard about a Plan B to forestall a recession of our own."