Chancellor Sunak will provide a one-year Spending Review this week. We will also see updated economic forecasts from the Office for Budget Responsibility. The Spending Review will cover only 2021/22 rather than four years due to the high levels of uncertainty about the economic outlook. The impact of Covid and the new trading relationship with the EU from next year increase the uncertainty. The Chancellor’s primary focus, for now, will remain on supporting the economy through the Covid disruption. There could also be indications of the need to start repairing the public finances. Government borrowing has already surged to £215bn in the first seven months of the financial year.
The OBR’s fiscal projections are driven by its forecasts for the economy in the coming years. Its last set of ‘forecasts’ in March were produced before the lockdown. The OBR’s central case was likely too pessimistic on economic growth this year at -12.4% versus around -11% for the BoE. More significant is the judgement on the medium-term economic outlook. The OBR’s central scenario for GDP shows output returning to pre-virus levels by the end of 2022. But the stakes are high and it will determine the government’s fiscal headroom in future years.
Also of interest is the appearance of Bank of England (BoE) Governor Bailey, along with fellow MPC members Haldane, Saunders and Tenreyro, at the Treasury Select Committee. They will be quizzed on the assumptions that underpin the Bank’s latest forecasts. They will give their views on recent developments such as the extension of the furlough scheme and the positive vaccine news. This week, we forecast UK services PMI to fall to around 44, below the key 50 expansion level for the first time since June. Last week, inflation increased to 0.7%, whilst retail sales rose for the sixth month in a row.
GBPEUR – 1.1215
GBPUSD – 1.3318
Markets will keep a close eye on EU/UK negotiations on a new trade deal, with time running short before the end of the transition period on 31 December. There is even the suggestion that allowances could be made for the ratification process to continue into the new year if a deal is agreed before the year-end. There is potential for volatility, which could be exacerbated by low volumes as the US closes up for Thanksgiving on Thursday. Meanwhile, Hungary and Poland vetoed the EU recovery fund and budget on rule-of-law conditions.
One key theme in recent data is the emergence of a two-speed economy, with manufacturing benefiting from the global recovery, while services activity is hit by renewed Covid restrictions. At the same time, the latest restrictions are expected to have a much smaller negative impact than the first lockdown. Eurozone services is expected to remain below 50 for a third month, declining to 44.0. We will also see the ECB minutes and French and German GDP this week.
EURUSD – 1.1875
EURGBP – 0.8917
Global risk sentiment remained broadly positive over the past week, supported by further encouraging news regarding Covid vaccines. The continued rise in global virus cases and deaths left investors more concerned about the near term outlook and the path to recovery. Pfizer upgraded its assessment of the effectiveness of its vaccine to 95%, almost matching the Moderna product, while the University of Oxford/AstraZeneca vaccine also reported promising results in phase-two trials. Japan recorded a sharp rise in coronavirus cases, while US Covid-related deaths exceeded a quarter of a million.
US Thanksgiving on Thursday means all economic data releases and events are squeezed into the first three days. Last week saw October retail sales increase by 0.3%, the smallest rise since the recovery began in May. This week, we will see the flash PMI readings, jobless claims and durable goods orders. We will also get the FOMC minutes and consumer sentiment on Wednesday before the markets close for Thursday and Friday for Thanksgiving.
GBPUSD – 1.3318
EURUSD – 1.1875
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*Interbank rates correct as at 7 am on the date of publishing.
