Investing.com – With UK government bond yields rising, Barclays (LON:) lowers its growth forecast for the fourth quarter, seeing a rising chance of a fiscal adjustment.
Fiscal policy has been the centre of attention this week as rising gilt yields implied the UK chancellor Rachel Reeves had even less headroom against her fiscal rules than she had previously thought, according to analysts at Barclays, in a note dated Jan. 12.
“With the OBR not due to confirm headroom until its forecast update on 26 March, there is a chance that yields fall back and create headroom, but if they stay where they are, it seems likely that the chancellor will have to make a fiscal adjustment,” Barclays added.
The bank thinks the most likely adjustment will come through spending, noting that Chief Secretary to the Treasury Darren Jones said on Thursday that public services will have to ‘live within their means’ and government sources have briefed that the chancellor is prepared to reduce departmental spending further.
Further, the unsynchronised timings of the fiscal rules (binding in five years) and the spending review (over three years) increase the incentive for the chancellor to pencil cuts in for the fourth and fifth years of the forecast.
“This is a tactic used at previous budgets by chancellors, but risks raising further credibility issues at a point when markets are probing and the real terms profile for spending beyond this year is already tight, particularly for unprotected departmental budgets,” Barclays added.
The UK bank revised lower its Q4 forecast to 0.0% on the quarter, from 0.1% previously, following downward revisions to the final Q3 GDP release. Barclays keeps its 2024 annual average forecast unchanged at 0.8%, but the adjustment pushes cuts its 2025 forecast down to 0.9% y/y, from 1.0% annually.
Barclays maintains its view for five cuts of the Bank Rate in 2025.
Survey data continues to point to a loosening labor market, which we expect to ultimately lead to softening wage growth and medium-term inflation, so long as inflation expectations remain anchored.
