The rebound in the main balances of the CBI Industrial Trends Survey in January offers further evidence that sentiment has taken an upward turn after the general election. This should help to convince the MPC not loosen monetary policy. Meanwhile, with public borrowing looking like it will come in below the OBR’s forecast this year, the Chancellor will have a little room to loosen fiscal policy further.
Less chance of a rate cut, but looser fiscal policy still on the way
- The rebound in the main balances of the CBI Industrial Trends Survey in January offers further evidence that sentiment has taken an upward turn after the general election. This should help to convince the MPC not loosen monetary policy. Meanwhile, with public borrowing looking like it will come in below the OBR’s forecast this year, the Chancellor will have a little room to loosen fiscal policy further.
- The business optimism balance of the CBI survey surged from -44 in October to +23 in January, the biggest quarterly change on record, giving a clear indication that companies are feeling much more upbeat after the general election. (See Chart 1.) This was reflected in the rise in the output expectations balance from -7 in December to +4 in January, which is consistent with manufacturing output growth flattening out and the IHS Markit manufacturing PMI recovering from 47.5 in December to about 51.0 in January. If the pick-up in sentiment is confirmed in the flash PMIs on Friday, then it could convince the MPC that the economy has turned a corner and that it does not need to cut rates from 0.75% at its meeting on 30th January.
- Meanwhile, the government remained on track to borrow less than the OBR anticipated this year. Borrowing fell to £4.8bn in December from £5.0bn a year earlier as a rise in the current budget deficit was more than offset by a fall in investment. Borrowing in the fiscal year to date is 8% higher than in 2018/19. If that trend continues, the deficit would be about £41bn (1.9% of GDP) this year, up from £38.1bn (1.8% of GDP) last year, but a better result than the £47.6bn (2.2%) deficit the OBR forecasts.
- This doesn’t give the Chancellor a blank cheque for the Budget on 11th March. A generous increase in spending on public services announced in the September 2019 spending round and a downgrade to the economic forecast will limit his ability to boost current spending. But less restrictive rules on government investment mean Javid has more headroom there. We suspect he will increase investment by about £10bn a year (0.5% of GDP). On top of a similar sized pre-announced rise in spending on government services, that would provide a substantial and much-needed boost to economic activity.
Chart 1: CBI Business Optimism & Manufacturing Output
Sources: Refinitiv, CBI
Table 1: Public Finances (Borrowing Basis)
Taxes on income & wealth
Current Total Spending
PSNB ex. Public sector banks
Debt ex. Fin. Interventions
(% of GDP)