Rachel Reeves had long stressed that today’s Spring Statement would be a mere update on the nation’s financial affairs and not an additional ‘fiscal event’. With previous versions having been given nearly as much attention as the Autumn Budget over recent years, the Chancellor and her predecessors have never been far away from speculation and judgement. This has led to an overly short-term focus by investors, which in turn has led to short-termism in policy, with the Chancellor too frequently having to look for sweeteners in their policies. By moving to one statement a year, Reeves hopes this will give space for more considered decisions, with long-term opportunities afforded the space to mature even if they lack short-term benefits.
As such, there was little expectation that the Chancellor’s statement would draw the attention of markets and that is indeed what has happened.
Reeves provided an update in the OBR’s economic projections for the UK economy, which suggested GDP growth will be 1.1% for this year, down from November’s forecast of 1.4%, yet forecasts for 2027 and 2028 are slightly higher than expected, at 1.6% each year. She also highlighted that borrowing is forecast to be slightly lower than previously expected. Beyond these figures and a retelling of previous policies, there was little to her announcements, with no policy changes announced.
This meant there was little of interest to investors. This point is especially true given the obviously more pressing story of the emerging conflict in Iran and its expansion across the Middle East. For investment markets, this is a new chapter of geopolitical instability, which brings uncertainty over the direction of the global economy.
The financial impact of the war will be hugely influenced by its duration. Should this be resolved in a matter of days or a few weeks then it is likely that the market losses we have seen over the past two days will soon be forgotten, yet should the conflict last into the medium-term then there is likely to be a more profound impact.
Energy prices are the most obvious risk factor for the global economy. As has long been feared, shipping through the Strait of Hormuz is now in real danger of attack from Iranian forces, meaning the supply of oil and gas from the Gulf nations is restricted. This hit to supply naturally increases the price and so we have seen oil jump from $70/barrel last week to $84, at the time of writing. This by itself is enough to increase global inflation at the margin, but so far is not at a level which could threaten major disruption. For context, it is worth remembering that when Russia invaded Ukraine in early 2022, oil jumped to nearly $130/barrel.
The market reaction to these movements has been negative. Global equity markets are down so far this week – yet, for a sense of scale, the FTSE 100 is still up for the year to date – while bond markets have also fallen. With an increase in inflation the likely outcome, the prospect for interest rate cuts has reduced. Two cuts had previously been expected from the Bank of England this year, with the first likely this month, but current pricing suggests one cut at the back end of this year is more likely at the present time.
Interestingly, gold is also falling in value. While this is often seen as a safe-haven in times of stress, a speculative surge in price over recent months means that common defensive characteristic has been lacking so far.
These movements are all very short term. This is a still escalating situation and therefore predictions of impact are not yet possible. In such a situation, as an investment manager it is often wise to be cautious in movements and to avoid knee-jerk reactions. Protection for these events comes more from diversified positions leading into a crisis rather than hasty changes in the midst of uncertainty and this is the practice we are utilising in the management of the Future Money portfolios.