Autumn Statement to confirm significant fiscal tightening in UK

Wednesday's Autumn Statement and associated Office for Budget Responsibility forecasts will be a key focus for UK investors this week. For FX markets, interest will centre on any revisions to the path of forecast fiscal consolidation given the current fiscal year to date has seen relatively high growth in borrowing and unexpected weakness in tax receipts. If existing fiscal balance forecasts are maintained, this increases the chance of additional fiscal tightening in the coming years, weighing further on growth. 

While there is also some chance the government chooses to delay or moderate the degree of fiscal tightening, George Osborne's commitment to return the fiscal balance to surplus within the life of the parliament has been clear and resolute. The fiscal tightening outlined in the OBR's Economic and Fiscal Outlook for July 2015 is worth about 5% of GDP on a cyclically adjusted basis over the life of the parliament. The improvement in the fiscal balance will largely be achieved through welfare cuts (£34.9bn) and net tax increases (£22.6bn). 

"We forecast it will weigh most heavily on private consumption, slowing its growth from 2.9% in 2015 to 1.9% in 2016 and finally 1.6% in 2017. This is a key contributor to our bearish GBPUSD view and significantly below-consensus UK GDP growth forecast of 1.9% in 2016 (from 2.4% this year) and 1.6% in 2017", notes Barclays.

The second release of Q3 UK GDP (Friday) is likely to be confirmed at 0.5% q/q (2.3% y/y, in line with the consensus forecast). The details should reveal growth continues to be driven by private consumption (0.7% q/q; +0.2pp contribution) and investment (1.2% q/q; +0.3pp contribution). These components of GDP, however, will likely contribute much less to GDP growth over 2016 and 2017 as fiscal tightening and EU referendum risk suppress activity in these parts of the economy. A change in stocks are expected to contribute +0.5pp, rebounding from their significant detraction in Q2, while it is believed that net trade could weigh on growth (-0.4pp) as imports rebound from a collapse in Q2.