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Positions in Europe: Short France (EWQ)

UK Chancellor of the Exchequer George Osborne’s Autumn Statement speech yesterday, an update to a similar speech on the country’s economic outlook and budget last given in March of this year, laid out the impact of Austerity’s Bite via downside revisions to GDP, higher unemployment, and persistent inflation versus previous estimates. Importantly, Osborne announced that Britain will need two extra years of austerity beyond April 2015 to meet its deficit reduction plan.

For a people already reeling from austerity’s impact and GDP that is likely to slip into recessionary territory as soon as Q4, an extension of austerity signals government budget mismanagement, which prolongs an already weak consumer and business environment that feeds in to slower growth and reduced tax receipts, which, along with spending cuts, are essential to paying down the deficit.

Taken together, we think the BoE is likely to cut its main interest rate and expand its asset purchasing program over the medium term to aid weak to negative growth over the longer term.  We expect inflation to remain sticky, despite improving comps in 2012, and see weaker trade demand from its main trading partner (EU countries) as the region’s sovereign and banking crisis presses on. We’ll stick to making near-term trading calls on the Pound, as the EUR and USD crosses remain extremely volatile and influenced by headline risk. 

Key Points in the Autumn Statement include:

Economic Outlook

  • 2011 GDP will only grow 0.9% versus its last forecast of 1.7%, according to the independent Office for Budget Responsibility (OBR) that prepares forecasts for the Treasury
  •  2012 GDP was cut to 0.7% from 2.5%
  • Only in 2015 will growth return to a healthy 3%
  • OBR doesn’t see CPI reaching the target rate of 2% until the end of 2013
  • Net debt will peak at 78% of GDP in 2014-5, compared to 67.5% in 2011
  • Unemployment will rise to 8.7% in 2012 versus 8.1% in 2011
  • Europe’s sovereign debt and banking crisis should negatively impact trade.  Around half of UK Trade is with the EU, its largest trading partner, helping around 300K businesses and leading directly or indirectly to 3.5MM jobs.

Budget Changes

  • The State Pension age will rise to 67 versus 66 between April 2026 and 2028
  • State workers will see a pay raise of only 1% (versus 2%) when the current pay freeze expires at the end of 2013
  • 700,000 public sector workers (versus 400,000) will be cut over the next 6 years
  • Spending cuts of £8.3 Billion in 2015-6 and £15.1 Billion in 2016-7 will be carried out on top of the already £80 Billion planned over 5 years
  • A fuel duty increase of 3 pence/L will be delayed to August 2012 versus January 2012
  • £30 billion of new capital investment for investment in infrastructure (road and rail networks), superfast broadband, extra money for schools and housing, and increasing the regional growth will be allocated
  • Up to £21bn will be given to strengthen the flow of credit to smaller businesses that do not have ready access to capital markets
  • In total, the government needs to borrow an extra £112 billion by 2016

In the past we've traded the UK via the etf EWU in Hedgeye Virtual Portfolio.  

Matthew Hedrick

Senior Analyst