Nowcasting Britain: Stable GDP Seen as Reeves Raises Taxes and Borrowing

The UK's Labour government announced its first budget this week, with Chancellor of the Exchequer Rachel Reeves announcing increases to taxes, spending and borrowing. Bonds dropped in the days after this expansionary policy was announced, as traders reduced bets on more than one Bank of England rate cut before the end of the year. The pound and most equities also fell.

Reeves and Prime Minister Keir Starmer might feel confident loosening the purse strings given the economic environment is relatively favorable -- at least compared to last year's contraction.

According to the latest update to CEIC's proprietary weekly nowcasts, real British GDP in the third quarter of calendar 2024 grew at a 0.78% year-on-year pace, slightly accelerating from 0.7% in the previous quarter. The Office for National Statistics (ONS) will publish its early estimate of Q3 GDP on November 14th.

The Bank of England started its monetary easing journey in August, cutting its key rate 25 basis points to 5%. Its next move -- another quarter-point cut, according to forecasts and futures -- is expected to come on Nov. 7 (the same day as the Federal Reserve's next meeting).

Bond bears are concerned that the Bank of England might be less inclined to cut further in the wake of Reeves' spending and borrowing package. CEIC users watching for real-time inflationary effects from the budget can track our nowcast estimates for consumer prices on a weekly basis.

Interestingly, different segments of the stock market had different takes on Reeves' budget. The large-capitalization FTSE 100 -- home to Britain's leading multinational companies -- and the FTSE 250, more focused on domestic British stocks, both declined. The AIM market of speculative stocks jumped, however, as the budget retained key tax incentives for these junior equities.

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