UK100 Subdued after the Government’s Tax Cuts & Minimum Wage Increase

UK Autumn Statement

The UK Chancellor of the Exchequer Jeremy Hunt unveiled the government's latest fiscal plans this week, one year after he assumed the office, following the mini-budget debacle of his predecessor. It also comes one year into the tenure of Prime Minister Rishi Sunak, just a few days after the government reshuffle and not long after his pledge to halve inflation was achieved. ^[1]

The "Autumn Statement for Growth" aims to revitalize the ailing UK economy and boost business investment by £20 billion a year according to Mr Hunt, who said that "we reduce debt, cut taxes and reward work". Amongst the key highlights, the Chancellor made full-expensing permanent, touting it as "the largest business tax cut in modern British history" and announced a 9.8% increase in the minimum wage from April 2024. ^[2]

Monetary Policy Implications

The measures however could make it harder for the Bank of England to control inflation and refrain from additional monetary tightening, after two consecutive holds. Headline CPI posted the smallest increase in two years in October, but the central bank does not expect it to fall below the 2% target for another two years. Furthermore, the increase in the National Living Wage comes amidst historically high pay growth that feeds a wage-price spiral.

Just as a reference, Australia boosted the minimum salary in July ^[3] and the Wage Price Index rose 1.3% q/q in the third quarter, in the biggest increase in the twenty-six years of the series. This does not help in restoring price stability and the country's central bank hiked rates this month after four consecutive holds, as inflation is "proving more persistent than expected a few months ago".

UK100 Analysis

The UK index did not show much reaction to the Chancellor's announcements, but remains subdued and lacks firm direction. The measures appear to be more tactical changes, rather than strategic shifts to spur long-term growth. Most importantly, they create upside risks to inflation, which the BoE struggles to control. Any more hikes could in turn derail the already frail economy. The Office for Budget Responsibility (OBR) slashed substantially its GDP forecasts and raised the ones for CPI for the next two years. ^[4]

The overhead daily Ichimoku cloud and the 200Days EMA have contained the recent rebound of UK100. This week's cautious stance creates risk for a decline to 7,368, although the 2023 lows are distant. However, UK100 runs a profitable month and has the potential to exit the cloud, although it does not inspire much confidence for a broader advance that would challenge 7,758.