UK public borrowing higher than expected in August

Chris Scicluna
Emily Nicol

Wall Street sinks as China Evergrande worries reverberate globally; Japanese stocks sink today as they play catch-up, but otherwise signs of stability in holiday-impacted trade
The September blues continued on Wall Street yesterday as investors in the US joined those in Europe in reacting to the growing worries about developments at China Evergrande Group – and the risk of contagion to other corporates – that alongside regulatory concerns had earlier in the day helped to roil stocks in Hong Kong. While a solid rally in the last hour of trade lifted the market off its lows, the S&P500 still closed down 1.7%, taking its loss for the month to date to 3.7%. Risk aversion meant that greenback held its ground against all but the yen, even though a rally in the US bond market lowered the yield on the 10Y note by 5bps to 1.31%.

Nerves seem to have settled somewhat in Asia today, however. While the Hang Seng is modestly weaker, China Evergrande’s stock down is now little changed on the day and Hong Kong real estate stocks have rebounded about 2%. This perhaps suggests that investors are less worried about contagion risks and/or more hopeful that the Chinese government will provide support to China Evergrande or to the broader system in the event that the developer fails. As a result, US equity futures have firmed more than ½% since Wall Street closed and the yield on the 10Y note has firmed 1bp to above 1.32%. Due to public holidays, markets remained closed today in Mainland China and South Korea (they will reopen tomorrow, when Hong Kong will close for a public holiday). With Japan’s stock market closed yesterday for a public holiday, it has played catch-up today. But even with the TOPIX declining 1.7% today, it remains up more than 5% for the month to date, easily outperforming other major markets. There were no important data releases in Japan today as the BoJ’s Board began its two-day policy meeting. Meanwhile, the flow of headlines generated by aspiring LDP leaders appears to have slowed.

Following its own steep fall yesterday, Australia’s ASX200 has firmed modestly today with Singapore iron ore futures stabilising near yesterday’s 10-month low. While the minutes from this month’s RBA Board meeting contained no surprises, Aussie bond yields moved a little lower, driven by the overnight decline in UST yields. Kiwi bond yields also moved lower, and short-end swaps rallied, with the market pricing out the risk of a 50bp rate hike at next month’s meeting. This move followed the release of notes from a cancelled speech by RBNZ Assistant Governor Hawkesby that signalled a preference to move the Bank’s policy rate in 25bp increments given normal levels of uncertainty and balanced risks to the outlook.

In other dollar-bloc news, projections suggest that Canadian PM Trudeau’s snap election gamble will leave his Liberal Party in power. But with Trudeau having been elected or leading in just 156 seats in the 338 seat parliament (with just under 32% of the vote counted), he will once again need support needed from elsewhere – most likely the New Democratic Party – in order to pass legislation.

UK public borrowing higher than expected in August but still trending well below OBR forecast giving some room for manoeuvre at next month’s Budget and spending review; CBI Industrial Trends Survey still to come in the UK, but a quiet day ahead in the euro area
Today’s UK public sector finance figures suggested that net borrowing in August was larger than had been expected, with the increase of £20.5bn inevitably the second-highest for that month on record, but still £5.5bn less than a year earlier. The ongoing economic recovery again helped to boost central government receipts in August, which were estimated to have risen by £9.6bn compared with August 2020 to £61.2bn, with tax revenue up by £4.1bn to £45bn, supported not least by higher PAYE and self-assessed income tax payments, VAT contributions and business rates. But central government expenditure stood at £79.6bn in August, down just £1bn from August 2020 despite a significantly larger drop in spending on the government’s Covid-support schemes (down £5.9bn compared with a year ago) as spending on procurement related to the pandemic, including the vaccination programme remained higher.

Despite the higher borrowing in August, it was still lower than forecast by the OBR. And it followed downward revisions to borrowing in previous months, by a cumulative £4.8bn since the start of the financial year. So, in the first five months of financial year 2021/22, public sector borrowing stood at £93.8bn, admittedly significantly higher than the average since the start of the series, but nevertheless almost half the amount borrowed in the equivalent period a year ago. Moreover, cumulative net borrowing is currently £31.8bn lower than had been forecast by the OBR in March. This notwithstanding, given the logging for the first time of expected expenditure (i.e. losses) of almost £21bn under the government’s loan guarantee schemes, today’s release also saw estimated public sector borrowing revised higher in the financial year ending March 2021, by £27.1bn to £325.1bn.

Against this backdrop, earlier this month, the government announced £14bn per year of tax increases – principally via the NICS system – and increases in spending on health and social care of the same amount, from next April. Overall, that package should be fiscally neutral, although the decision to use the NICS system for funding the package seems likely to be growth-negative (and jobs-negative) at the margin. The government also announced its overall spending envelope for government departments for the coming three years, with public service spending set to increase at an average real rate of 3.2% per year. Given the extra funding already committed to health and social care and certain other items, as noted by the IFS, these figures imply near-flat real spending for many ‘unprotected’ departments, particularly if any extra pandemic-related expenditure is required. But at the same time, UK taxes as a share of GDP will reach their highest ever level on a sustained basis. And, while the Chancellor is likely to have a little more room for manoeuvre given the recent strong-than-expected performance of the public finances, the Budget and full Spending Review announcement on 27 October is likely to confirm a modest tightening of the fiscal stance from next April, and a more significant tightening of the fiscal stance from April 2023 on – one reason why the BoE will avoid tightening monetary policy significantly over the horizon.

Later this morning, the CBI’s UK industrial trends survey for September is likely to report ongoing disruption to the manufacturing sector – subdued production, high backlogs and elevated prices – caused by persistent supply bottlenecks, with the ongoing spike in energy prices another factor likely to have hit sentiment in the sector. It will, however, be a quiet day in the euro area with no new data of note due.

Housing focus continues in the US today as investors await tomorrow’s FOMC announcement
As investors await tomorrow’s FOMC announcement, the focus in the US today will remain on housing. Following yesterday’s news of a modest rise in the NAHB housing index in September, today brings the release of housing starts and permits data for August. While he expects some softening of single unit starts in light of lower new home sales and rising inventories, Daiwa America’s Chief Economist Mike Moran expects a continuation of the recent positive trend in multi-unit starts to leave overall starts little changed.

Consumer sentiment steady in Australia last week; nothing of note in the RBA Board minutes
A quiet day in Australia brought only the release of the weekly consumer sentiment survey and the minutes from this month’s RBA Board meeting. After picking up a little last week, the ANZ-Roy Morgan consumer confidence index rose a negligible 0.2% to 103.3, with respondents more upbeat about the economic outlook but less upbeat about recent financial developments – the latter likely reflecting the recent slide in the Aussie stock market. As usual, the RBA Board minutes contained no new insights, with the RBA’s views on the economy and policy outlook clearly articulated by Governor Lowe when he delivered his speech to the Anika Foundation last week. The Board did discuss the possibility of deferring the QE taper until November. But given the expectation that the economy would return to its pre-Delta path by the middle of next year, the Board decided to taper weekly purchases to A$4bn as had been announced, but to extend the period over which bonds would be purchased at this rate until the middle of February.

Kiwi consumer confidence falls as lockdown weighs; RBNZ official indicates preference for moving interest rates in 25bp increments
Today’s Kiwi diary brought the release of the quarterly Westpac consumer confidence survey for Q3 and notes from a cancelled speech by RBNZ Assistant Governor Hawkesby. Unsurprisingly, the former pointed to some impact from the recent lockdown, with the headline index falling 4.4pts to 102.7 – a well below average reading that is nonetheless still 7.6pts above last year’s pandemic low-point. Hawkesby’s speech notes exerted a much greater influence on local markets, which before today had been pricing a non-trivial risk of the RBNZ lifting the OCR by 50bps at next month’s meeting – especially with lockdown restrictions in Auckland easing slightly from the end of today. Specifically, Hawkesby noted that “when there is a typical amount of uncertainty, and the risks are evenly balanced, then central banks globally tend to follow a smoothed path and keep their policy rate unchanged or move in 25bp increments”. Given ongoing levels of uncertainty about the economic outlook with risks both weighs, the market interpreted these comments as ruling out a more decisive shift in the bank’s policy rate next month. 

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