Fiscal policy tightening just as the recession begins

While the risk premium that pushed gilt yields up and the pound down after the mini-budget has mostly been reversed under the stewardship of Sunak and Hunt, the fear that the markets will baulk at any fiscal indiscipline means that the Chancellor will substantially tighten fiscal policy even though the economy is probably already in recession. Indeed, if the rumours are right, then a £54bn (1.9% of GDP fiscal consolidation announced in the Autumn Statement on 17^th November would be similar in size to the “austerity” Budget of 2010. Tighter fiscal policy risks deepening the recession, which we think started in Q3 with a 0.6% q/q decline in real GDP. It might mean, though, that the Bank of England can take its foot off the interest rate brake a bit sooner than otherwise.

We’ll be discussing the implications for the economy and the financial markets of the Autumn Statement in a 20-minute online briefing at 4pm GMT on 17th November. (Register here.)