A lot of the announcements in the budget had already been leaked to the press, leaving just the 50% tax band as the big surprise, although essentially even this was a sideshow as it is not going to raise a significant amount, around 6 billion pounds and most of that from top footballers, who have just seen their wages fall. The budget hurt the Pound, not due to the change in the top rate of tax, but due to the extremely high borrowing figures, and even those figures are based upon very improbable, and extremely optimistic, growth numbers for the coming years. Darling predicts GDP falling by 3.5% this year, but recovering into growth after that, and staying at a high level of growth in the following years, increasing tax revenue, and decreasing government spending as a proportion of GDP. However in a case of very bad timing the IMF released their projections for growth on the UK, and they are much more pessimistic, predicting a 0.4% decrease in growth in 2010. The government are notoriously bad at projecting levels of public debt, and with the economy unlikely to grow at the rate they predict, the levels will be even higher than their forecast, although of course it is uncertain whether they will be in power at the time anyway.
The budget may dominate the news but it wasn't the only economic event yesterday with the BoE minutes released, along with the latest figures from the labour market. The BoE minutes were as expected with a unanimous vote for no change, the labour figures actually came out better than expected, but still showed a rise in the claimant count to 4.5%. The overall effect of the days events, dominated by the budget, the Pound down, sending it crashing from above 1.13 against the Euro, to almost 1.11, although it has recovered to just under 1.12 since, and it has also fallen down below 1.45 against the Dollar, again recovering to sit above this level.
Away from the UK, the US markets were once again dominated by earnings reports with the market rallying throughout the day as a number of reports came in better than expected, also helped along by a gauge of house prices posting a second consecutive rise for the first time in two years. However the rally was pulled back just before closing as once again the concerns over what the governments stress tests will reveal about the banks condition, when it is released on May the 4th. Despite the fall in the US, Asian stocks stayed buoyant overnight, and this has helped the Euro climb back up above 1.30 against the Dollar.
The UK takes the day of to mull over the state of government finances, so the big event of the day will the Euro PMI's, which are expected to show some small improvements but still stay at very weak levels, which is a phrase I've seen a lot lately, but at least shows some bottoming out of the economic downturn. The Pound is expected to stay on the defensive today, as economists and analysts mull over yesterday's budget, but the euro PMI's should remind the markets that the UK isn't the only country struggling.
Michael Corcoran | Treasury Solutions Partner |Wholesale Banking | National Australia Bank Limited