Wil Rachael test her Golden Rule

This week, Rachael Reeves will deliver her sprig statement, in which she will attempt to find a way to follow Gordon Brown’s “Golden Rule”: spending what you earn and only borrowing to invest. When put like that, it seems pretty sensible. The trouble is when you earn less than you expected, spend more than you should, and leave little room for investment. Increasing taxes risks hurting growth and cutting spending; likewise, borrowing more risks higher funding costs and further risk to inflation. This past week, we heard wages are growing at an annual rate of just under 6%, outpacing inflation for almost 18 months, which is why the Bank of England are struggling to cut interest rates despite the weak growth outlook. It will be hard to get inflation back to 2% when earnings grow at such a rate.

Poor Ms Reeves is facing a tough time. The weaker economic outlook has risked the Chancellor breaching the fiscal rule she is wedded to. Raising taxes and cutting spending risks further impacting growth and putting further pressure on the need to borrow more. Much of what Ms Reeves will say may depend on the OBR’s forecasts; as we know, they are pretty hopeless at getting it right, not unlike most economic forecasters.

Despite the risks surrounding the global economy, US stocks held onto modest gains this week, breaking a multi-week losing streak.  Volumes remain light, which indicates little conviction for buyers to spend. Selling probably dried up. With the first quarter earnings season on the horizon, many companies are providing a cautious outlook, and with government securities providing a safe haven alternative whilst the economic picture remains uncertain, there seems little rush to return to risky assets.

So, aside from the Spring statement, what do we have to look forward to this week? The flash PMIs will be closely watched. February’s flash data set alarm bells ringing that perhaps the economic picture was looking less rosy, particularly in the US. The S&P Global flash PMI revealed a sharp slowdown in US services business growth. The survey also found rapidly rising costs, and concerns rose that the US economy could enter a period of stagflation.

Other key releases this week are likely to influence the Federal Reserve and guide potential changes in monetary policy. Core PCE prices, the Fed’s preferred measure of inflation, are released on Friday, along with other macro indicators, including durable goods orders and continuing jobless claims. We get the latest inflation data, retail sales and the final GDP report for the UK. Business sentiment in Germany will also be eyed for the impact of recent debt brake developments.