UK budget: “time to act boldly with fiscal policy” amid coronavirus outbreak
Wednesday’s budget announcement from recently installed Chancellor of the Exchequer Rishi Sunak will still be one of the week’s biggest events despite the oil price crash and ongoing virus worries.
Most are expecting the government to focus on fulfilling Conservative election promises to ‘level up’ Britain’s deprived northern regions with infrastructure spending, as well as supporting businesses that could find themselves at the sharp end of the coronavirus pandemic.
The budget is likely to see a heavy focus on emergency policy measures to deal with the growing risks from COVID-19, some analysts said.
“If there was ever a time to act boldly with fiscal policy in order to keep a fundamentally healthy economy afloat through a temporary shock, then this is it,” said Kallum Pickering at Berenberg.
“While a fiscal stimulus cannot offset the supply and demand shock to the UK economy from COVID-19, it can prevent the serious temporary hit from developing into a more severe and protracted downturn. Without such a policy response, the economy would be vulnerable to wealth and confidence effects and cash-flow problems for businesses and households that could worsen the demand and supply side shock.”
Sunak could also cancel the plans to lift corporation tax that are due to come into force on 1 April as a short-term measure, suggested EY’s tax policy expert, Chris Sanger.
Others fiscal stimulus ideas, such as increasing provisions for ‘time to pay’ and making cuts to indirect taxes to stimulate are “powerful” and “can act quickly and be removed easily”, Sanger said, along with temporary cuts in employers’ national insurance or other rates changes perhaps tempting for the Chancellor but representing big costs to the Exchequer.
Among other measures, Sunak is expected to announce an end to the freeze on fuel duty as part of government efforts to tackle climate change and accelerate the transition towards electric vehicles before petrol and diesel cars are banned in 2035.
Analysts at Barclays said they expected the ‘levelling up’ efforts will cause deficits, “largely structural”, to grind up from 2.1% of gross domestic product in the current fiscal year to almost 3% in three years.
Elsewhere on the macro front, data on a UK GDP, industrial production, services and trade will also be released as a preview to the budget.
Balfour Beatty to cheer on HS2 green light
In company news, one beneficiary of the government’s infrastructure spending lavishness is Balfour Beatty plc (LON:BBY), though its finals on Wednesday should not bring many surprises given a December trading update.
The construction group said full-year operating profit was going to come in slightly ahead of expectations, while the year-end order book was “significantly” higher even before the green light to HS2.
Revenue was flagged to be 5% higher, with profit from operations broadly flat and average monthly net cash to come in at £310mln, ahead of guidance.
Investors will focus on the outlook for construction and services in terms of commitment to HS2 and recent order book momentum.
Analysts at Peel Hunt said it is probably a bit early for a formal update on the ongoing investigations in US military housing, part of its investments arm.
But the results come alongside the UK’s budget, investors will be hoping for an increase in infrastructure spending later in the day.
Pru under pressure
The demerger was completed in October, with Pru boss Mike Wells saying it would allow both businesses to “maximise their potential performance”.
However, activist investor Third Point, Pru’s second-largest shareholder with around 5% stake, said the life insurer should split itself again, to separate its US and Asian operations, claiming this will “increase investment in both businesses, optimise growth, and drive higher valuation”.
Analysts at Hargreaves Lansdown said there was a certain logic, “in so far as the logic for keeping the two units together isn’t immediately clear” but they were “not really convinced” splitting up would deliver many benefits either.
“Nonetheless the market noise does make these a relatively interesting set of results – with pressure on management to deliver.”
Investors will be interested to hear what management says about the fast-growing Asian operations in light of the coronavirus outbreak.
Significant announcements on Wednesday 11 March:
Finals: Prudential PLC (LON:PRU), Balfour Beatty plc (LON:BBY), Dignity PLC (LON:DTY), Breedon Group PLC (LON:BREE), FDM Group Holdings PLC (LON:FDM), Gem Diamonds Ltd (LON:GEMD), Lookers PLC (LON:LOOK), Aptitude Software Group PLC (LON:APTD), Advanced Medical Solutions Group PLC (LON:AMS), Spirax-Sarco Engineering PLC (LON:SPX), IP Group Plc (LON:IPO), Quilter PLC (LON:QLT)
Economic data: US inflation, UK GDP, UK production