The Autumn Budget's impact on the stock market landscape: Analysis and reactions.
Negative Market Reaction to UK Chancellor's Autumn Budget
The UK stock market has taken a hit following the Autumn Budget speech by Chancellor Rachel Reeves, with the FTSE 100 dropping by around 0.8%. The budget, which includes significant tax increases and higher spending, has raised concerns about rising costs for businesses and consumers, potentially dampening economic growth and investment confidence.
One of the key reasons for the negative reaction is the increase in business costs. The Budget introduced increased business rates, a 1.2% rise in employer National Insurance Contributions, and a substantial rise in the national minimum wage. These measures, especially for labour-intensive sectors like retail, hospitality, and logistics, increase operational expenses, adding further financial pressure.
Moreover, the reduction in energy cost support exposes companies to volatility and higher energy costs. The termination of temporary “super-deductions” for investments and replacement with less generous tax relief also reduces incentives for businesses to invest in growth.
Business tax burdens are at a 25-year high, and additional tax increases intensify worries about competitiveness and profitability, especially during global uncertainties and supply chain challenges. Weaker private sector and consumer confidence, due to rising inflation, income squeezes, and overall economic uncertainty, limit firms’ willingness to commit to longer-term projects.
Policy uncertainty surrounding future government policies also contributes to negative market sentiment. The period leading up to and following the Autumn Budget has been marked by uncertainty, making businesses and investors cautious.
Investors and business groups have highlighted sluggish growth, inflation pressures, and an uncertain outlook as factors dampening enthusiasm. The call for "no more business taxes" underscores the tension between government fiscal measures and market appetite.
Despite some positive GDP growth surprises, the budget's combination of tax rises and spending increases is perceived as a potential drag on business profitability, investment, and consumer spending.
The Budget will increase spending by £70bn annually, with around half of this being funded by an increase in borrowing. The Office for Budget Responsibility (OBR) states that this fiscal loosening is one of the largest in recent decades, equivalent to around 1% of GDP. The UK Debt Management Office announced an increased financing requirement for the 2024/25 fiscal year, amounting to £300bn overall.
However, some positives have been noted. The director of the Institute for Fiscal Studies, Paul Johnson, called the focus on long-term investment a "courageous move." Any funds unlocked by the change in fiscal rules will be invested in the UK economy to boost long-term growth.
Deutsche Bank strategist Shreyas Gopal notes that the market is expecting a more hawkish Bank of England as a result of the larger-than-expected fiscal event. Banks were among the select few risers on the FTSE 100, as they stand to benefit from a stronger interest rate environment.
Despite the negative market reaction, UK equities were not materially underperforming peers this morning, suggesting the market is adjusting to a larger-than-expected fiscal event. The budget speech caused markets to react negatively due to the large increase in borrowing to fund the spending plans. Rate-sensitive areas of the market have been hit the hardest, as markets temper expectations for how quickly the Bank of England will cut interest rates.
Gilt yields rose in the lead-up to the Budget, indicating additional risk. Following the Budget, 10-year gilt yields have risen to their highest level this year, at around 4.4%. Higher borrowing may not be good news for sectors like housebuilders and retailers, as it could prolong pressures on household finances.
In summary, the Autumn Budget’s combination of tax rises and spending increases is perceived as a potential drag on business profitability, investment, and consumer spending, leading to negative reactions despite some positive GDP data.
Investors and businesses are concerned about the impact of increased interest rates due to the UK's larger-than-expected fiscal event, stemming from the Autumn Budget. The increased spending plans, funded by a high borrowing rate, may negatively affect business profitability, investment, and consumer spending, especially in sectors like housebuilders and retailers.
The financing requirement for the 2024/25 fiscal year has been increased to £300bn overall, and rising borrowing costs could add further financial pressure on businesses, potentially reducing their willingness to invest and grow.
