UK Autumn Statement: Phasing out of austerity, but no fiscal stimulus kick-off;  Improving investor confidence because of or despite Donald Trump?;  How international trade increases the wealth of nations;  Oil price update – OPEC’s Vienna summit: What to expect?;   India cash demonetisation update

UK Autumn Statement: Phasing out of austerity, but no fiscal stimulus kick-off
Interestingly, and perhaps by some cosmic irony, a small portion of the expected worsening of public finances stems from an increase in payments to the European Union over the next few years. This is due to the fact that much of the UK’s payment into the EU budget is euro-denominated, meaning that the large depreciation in £-sterling has had the effect of increasing the payments in £-sterling terms – roughly by £0.8bn a year from 2018 onwards.

The main message for us is that this budget announcement only messaged an end to ever tighter fiscal austerity, even if it didn’t switch straight to large-scale fiscal expansion stimulus. Against the backdrop of a presently relatively strong UK economy and the absence of an immediate Brexit inflicted demand shock, such measures would have also looked neither necessary nor prudent.

Improving investor confidence because of or despite Donald Trump?
At the moment, the jury is out on whether the movement from bonds into equities is an inflation rotation, or a growth-driven rotation back to a more normal growth and financial market expectation environment. Either way, financials and materials stocks, which had biggest inflows in three years, are key beneficiaries, while government bond outflows are the largest in a year.

We currently believe that markets have moved because of the economic momentum already under way and have simply not been derailed by the political upset. This would bode well for early 2017, because a growth rather than inflation driven yield increase is far less likely to slow down the US and world economy than recent yield increases, which were driven by fears of central bank policy errors more than rising growth expectations.

How international trade increases the wealth of nations
A free trade agreement between the UK and the EU is an intermediate option between EEA membership (like Norway) and trading under general World Trade Organisation rules.

In this case, a free trade agreement will offer less access to the single market but impose fewer obligations. The key issue for the UK will be properly understanding and maintaining its comparative advantage, while ensuring that tariffs, quotas or otherwise do not eradicate the UK’s competitiveness in services.

Oil price update – OPEC’s Vienna summit: What to expect?
With so much up in the air, the success or failure in Vienna is but a number of major determinants of the oil price. Over the near term, it would seem to us at Tatton that the current oil oversupply is set to continue. Saudi Arabia’s late announcement that it would not attend the non-Opec Vienna pre-meeting is already casting fresh doubts whether far reaching supply side coordination for 2017 will be at all possible.  Beyond 2017 however, much will depend on whether the new, less capital intensive and faster realisable fracking technologies will be able to substitute the volumes of older less efficient production capacities, which at current oil price levels will be run off over time.

India cash demonetisation update
While there seems to be a common consensus that the move to stamp out corruption could have long-term positives, the country may face a number of short-term challenges from the sudden drain of a large amount of liquidity.

Modi’s decision to crack down on the shadow or non-tax paying ‘black’ economy by withdrawing higher-value notes in the middle of crop sowing and wedding season appears to have brought large parts of the economy to a virtual halt. India was up to now still overwhelmingly a cash economy, with an estimated 90% of all transactions taking place in cash in both the ‘black’ and ‘white’ economies.

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