UK budget deficit widened unexpectedly, but factory orders rise – as it happened

Graeme Wearden (until 1.30pm) and Nick Fletcher

from on 2017-11-21 17:35 (#38JMN)

Britain borrowed more than expected last month, but borrowing is still down almost 10% since the start of the financial year

UK factory orders have surged
Breaking: Deficit widened to 8bn in October
Deficit has risen from 7.5bn in October 2016
Rising debt repayment costs blamed
Reuters: Debt figures highlight Hammond's budget headache

5.35pm GMT

Markets have shrugged off a host of uncertainties - the political outlook for Germany, the budget in the UK, the latest Brexit developments, US tax reforms - to end the day in positive territory.

The mood was helped by positive US earnings and housing data, which pushed Wall Street to new highs. The final scores showed:

4.27pm GMT

US markets are hitting new highs, helped by positive earnings reports and better than expected housing figures. Joshua Mahony, market analyst at IG, said:

Global stocks are on the rise today, with US indices proving the big outperformer on the day amid further improvements to the corporate earnings picture. With gold and the yen rising in the afternoon, there is an interesting risk-off shift coming in play despite the record highs being set across US indices.

This afternoon saw the US economic picture improve once more, with existing home sales beating market expectations in October. The 2% rise in US existing home sales comes as the US gets back on its feet in the wake of Hurricanes Harvey and Irma. US markets have been punching higher in early trade, as they continue to benefit from an earnings season that appears to be the gift that keeps on giving, as home-improvement firm Lowe's seeing a 6.5% year-on-year jump in sales in the wake of recent hurricane destruction.

The recent lack of direction in sterling has been a reflection of the largely sideways trade for the FTSE. However, with a growing feeling that the Tory Brexiteers are increasingly open to improving the divorce settlement offer, the likeliness of a December trade talk kick-off seems to be rising. With the UK budget due out tomorrow, the focus on the UK is likely to remain in place, with a heavily housing based speech from Phillip Hammond expected.

3.34pm GMT

Meanwhile some positive developments relating to Greece. Helena Smith writes:

The European Commission has given the Greek government the green light today to distribute a1.4bn worth of social welfare benefits to citizens worst affected by the gruelling austerity measures Athens has been forced to take in return for bailout assistance.

Addressing the European parliament's economic and monetary affairs committee, European Commission vice president Valdis Dombrovskis said as Greece had overperformed fiscally, achieving a primary surplus of 1.75 %, its leftist-led government could honour its pledge to hand out a "social dividend" to those hardest hit by the country's long economic crisis.

The endorsement by Dombrovskis, a one time harsh critic of Greece's inability to meet fiscal targets, is a 180 degree volte face from the reaction prime minister Alexis Tsipras received when he announced pre-Christmas 'gift' handouts last December.

In a televised address that took many by surprise last week, Tsipras said the government had decided to more than double the amount it would distribute in the form of a one-off "social dividend" this year. Among those entitled to the handout are low-income pensioners and unemployed.

3.20pm GMT

Back with the UK, and here's our report on Airbus warning MPs about the possible effects of Brexit:

Airbus has told MPs that Britain risks losing the "crown jewels" of its aviation industry to China as a result of Brexit, putting up to 7,000 wing-manufacturing jobs in Wales at risk.

The head of the company's UK operations warned the business select committee that the threat of new customs bureaucracy and reduced employee mobility could deter long-term investment and accelerate a shift to Asia.

3.13pm GMT

And more positive US economic news.

Existing home sales rose by more than expected in October, up 2% to a seasonally adjusted annual rate of 5.48m units, helped by a recovery from the disruption caused by recent hurricanes. September's figure was revised down from 5.39m to 5.37m. Analysts had been expecting a figure of 5.42 for October.

Job growth in most of the country continues to carry on at a robust level and is starting to slowly push up wages, which is in turn giving households added assurance that now is a good time to buy a home.

While the housing market gained a little more momentum last month, sales are still below year ago levels because low inventory is limiting choices for prospective buyers and keeping price growth elevated.

2.53pm GMT

US markets have made a bright start, with technology stocks moving higher and pushing the Nasdaq Composite to new highs.

The Dow Jones Industrial Average is currently up 140 points while the S&P 500 opened 0.33% higher and the Nasdaq up 0.46%. Higher oil prices and some relatively positive reports from retailers Urban Outfitters and Dollar Tree.

2.26pm GMT

Here's a quick summary of the Bank of England hearing at the Treasury Select Committee, from Oxford Economics:

Little in at today's UK Treasury Committee hearing to suggest the Bank of England will raise UK int rates again soon. With current high inflation cited as a rationale for the recent hike, a sharp inflation fall in 2018 shd keep rates on hold medium-term: https://t.co/gdsp5z6zi2 pic.twitter.com/MGBHW5h6Ur

2.10pm GMT

Over in the US, and another positive pointer for the country's economy.

The Chicago Fed National Activity index - an average of several indicators of economic activity - rose from 0.36 in September to 0.65 in October, better than the 0.2 figure expected by analysts. The September number was also revised upwards from the initial reading of 0.17.

Chicago Fed "Index Points to a Pickup in Economic Growth in October" https://t.co/BVUUSCFigz pic.twitter.com/JRQBeeuhCs

2.02pm GMT

Markets seem unshaken by the various disappointments around. Connor Campbell, financial analyst at Spreadex, said:

Despite the unresolved political situation in Germany, a brewing Tory backlash over the Cabinet's movement on the EU divorce bill, and an unexpected widening of the deficit ahead of tomorrow's Autumn Budget, things were pretty damn quiet this Tuesday.

Investors seemed wary of getting too involved with the forex markets. The pound is flat against the dollar and up 0.1% against the euro, while the euro itself effectively unchanged against the greenback, sporadically dipping 0.1%.

2.01pm GMT

Here's our story on the UK budget deficit:

Britain's deficit unexpectedly widened in October, handing Philip Hammond disappointing news on the eve of the budget.

Public sector net borrowing last month, excluding the nationalised banks, grew by 500m to 8bn compared with October a year ago, according to the Office for National Statistics (ONS).

1.19pm GMT

Time for a quick recap:

Budget Eve has got off to a bad start for Philip Hammond, with new figures showing that Britain's deficit rose last month. The UK borrowed 8bn in October, up from 7.5bn a year ago and almost a billion pounds more than the City expected.

Today's borrowing numbers are not bad news (as some are suggesting). Borrowing this year still on course to come in well below March forecasts. We can expect the bad news tomorrow in reduced productivity and growth forecasts hitting public finances in longer term.

"UK manufacturers are once more performing strongly as global growth and the lower level of sterling continue to support demand. Output growth has picked up again, and export order books match the highest in more than 20 years.

"Nonetheless, uncertainty continues to hold back investment and cost pressures remain strong. Manufacturers will be hoping the Budget brings some relief from the business rates burden in particular."

12.57pm GMT

The news that Britain's deficit rose to 8bn last month has disappointed some City traders.

Carlo Alberto De Casa, chief analyst at ActivTrades, says the chancellor would have hoped for a drop in borrowing (as economists had indeed expected).

This isn't the news Hammond will have been hoping for the day before the budget, as the deficit has increased to 8.0bn from 7.5bn a year earlier.

Despite rises in income and VAT receipts and expectations the deficit would narrow closer to 7.bn, inflation and the effect it has had on debt costs has caused the deficit to widen and suggests Carney was right to start focusing on keeping inflation under control with his historical interest rate rise.

Higher borrowing costs due to inflation drove the deficit up, although the effect on the pound has been limited.

The deficit figures come as analysts await Chancellor Phillip Hammond's budget tomorrow. Today's data highlights the challenge Hammond faces, as many analysts expect a call for more spending as the UK's economic growth weakens. Investors will be watching the pound closely to see how it reacts tomorrow to the budget."

The more critical issue for the Budget is how public borrowing will evolve in future years. Lower than expected productivity growth is likely to weigh more heavily in the OBR's new forecasts tomorrow than the borrowing undershoot this year.

"We do expect the Chancellor to retain a reasonable amount of headroom in meeting his medium-term fiscal target, but he is likely to want to retain most of this as a contingency to deal with any future adverse Brexit-related shocks. While we do expect some giveaways in the Budget on housing, health and some areas of public sector pay, we also expect these to be largely offset by clawbacks in other tax and spending areas."

Hammond is still on target to beat a target of 58.3 billion for the 2017/18 financial year. Not bad considering the circumstances.

This means that this year Hammond actually still has some room for manoeuvre, however looking ahead to the coming years, his challenge looks set to intensify. The ONS is expected to forecast lower levels of growth for the UK in the coming years. For the Chancellor, this means lower tax receipts and therefore less money coming in.

That good news is likely to provide some offset to tomorrow's productivity downgrade. But the Chancellor's headroom is still likely to shrinkhttps://t.co/Kxw4j14JpB pic.twitter.com/KMmpo1myHA

12.49pm GMT

Over at parliament, the head of Airbus UK has warned MPs that other countries are keen to lure some of its British manufacturing business.

Katherine Bennett told the Business, energy and industrial strategy committee that Airbus's wing design business - its "crown jewels" - has won covetous looks from overseas.

Airbus UK Vice President warns that wing designer are "crown jewels" of the industry. Currently theirs are designed and made in UK but other countries are "knocking on the door" as result of #Brexit

Airbus UK boss Katherine Bennett: "Other countries would dearly love to build wings and believe you me they're knocking at the door as a result of the situation we're in".

12.23pm GMT

Guardian Business has launched a daily email.

Besides the key news headlines that you'd expect, there's an at-a-glance agenda of the day's main events, insightful opinion pieces and a quality feature to sink your teeth into each day.

11.32am GMT

Despite the recent surge in orders, UK factory bosses expect growth to slow over the next quarter.

A failure to invest in new equipment may be to blame.....

Manufacturers expect growth in output to slow-despite surging orders-according to the CBI. This signals that capacity constraints are biting, because manufacturers have lacked the confidence to invest due to Brexit risk. pic.twitter.com/3xtj5eyQZR

11.22am GMT

Newsflash: UK factories have just reported the biggest jump in new orders since 1988, as the weak pound boosts exports.

That's according to the CBI's monthly survey of British manufacturing. It found that output rose in the last quarter, with more orders coming in from abroad.

UK CBI Nov trends total orders 17 vs 3 expected https://t.co/OzAMoOAHus pic.twitter.com/AifJ99fTg3

Both total and export order books improved over the last three months, with total orders now among the strongest since August 1988. #CBI_ITS https://t.co/1k4iI8q8tN pic.twitter.com/P8FlF2cJRS

11.10am GMT

Here's John McDonnell MP, Labour's Shadow Chancellor, on today's public finances:

"These figures are a reminder of the continued failure of both Philip Hammond and Theresa May over these past seven years. The deficit has still not been eliminated as they promised it would be by 2015, and the national debt continues to grow. The rise in the Government's deficit over October shows once again that seven years of Tory spending cuts have caused pain and misery for millions with little to show for it.

"It further highlights why it is so vital that we see a change of course in the Budget tomorrow, halting the growing emergency in our public services and ending their failed austerity policies.

11.08am GMT

October's borrowing figures are another sign that the Brexit vote is hurting the UK economy, says Labour MP Chris Leslie.

"Rather than delivering a huge windfall for public services and our economy, it is clear that Brexit is in fact damaging the public finances.

"Soaring inflation resulting from the fall in the value of the pound is resulting in rising debt costs. Our NHS and public services are being starved of vital funding. And the Brexit 'war chest' set aside by the Chancellor in March has now been virtually wiped out.

11.04am GMT

Howard Archer, chief economic adviser at the EY Item Club, says the "weakened" October public finances have denied Philip Hammond a boost ahead of Wednesday's budget.

#Hammond denied a boost going into Wednesday's #budget as #public #finances see y/y deterioration in Oct. PSNBex up to 8.0 bn from 7.5 bn in Oct 2016

Despite widening to 8.0 bn in Oct from 7.5 bn a year earlier, #UK #budget deficit (PSNBex) still down 9.6% y/y over Apr-Oct at 38.5 bn. If continued pattern for whole of 2017/18 would come in at 41.4 bn vs 58.3 bn seen in March budget

10.49am GMT

Digging into the public finances, we can see that income tax receipts rose by 6.9% year-on-year in October, and VAT receipts rose by 2.3%.

But corporation tax dropped by almost 1% compared with October 2016, and revenue from fuel duty dropped by 2.1%.

10.41am GMT

Bloomberg describe Britain's October's public finances as "disappointing", ahead of Wednesday's budget.

However, they still expect borrowing for 2017-18 as a whole to be lower than forecast.

Britain's fiscal deficit unexpectedly widened as inflation saw debt costs rise to the highest for any October in 4 years https://t.co/QEFDXpkJGC pic.twitter.com/aCnl71SlLC

10.38am GMT

The ONS reports that UK government income, and spending, are both higher than a year ago.

In the current financial year-to-date, central government received 394.3bn in income, including 292.7bn in taxes. This was around 4% more than in the same period in the previous financial year.

Over the same period, central government spent 420.4bn; around 3% more than in the same period in the previous financial year. Of this amount, just below two-thirds was spent by central government departments (such as health, education and defence), around one-third on social benefits (such as pensions, unemployment payments, Child Benefit and Maternity Pay), with the remaining being spent on capital investment and interest on government's outstanding debt.

10.27am GMT

Ross Campbell, public sector director at accountancy group ICAEW, says Philip Hammond doesn't have much wriggle room for tomorrow's budget.

Looking at the annual trend, we are still running a large deficit which means our national debt continues to grow.

10.21am GMT

UK public sector borrowing rose to 8bn in October (est. 7bn), up 500m since the same period last year, linked to recent higher inflation and increased debt costs.

10.18am GMT

Economist Sam Tombs of Pantheon Economics reckons Britain will borrow less than forecast this financial year, despite the unexpected rise in October's deficit.

Borrowing 0.5B higher in October than a year ago mainly due to a 1.2B jump in interest payments (blame high inflation). But borrowing is still on track to substantially undershoot March Budget forecasts: pic.twitter.com/kFh5oXEJ0J

10.08am GMT

Britain's deficit jumped last month because the cost of repaying existing government debt jumped in October.

That's because some government bonds are linked to inflation, to protect bond-holders from a surge in the cost of living.

In October 2017, the debt interest paid by central government was 6.0 billion, while this represents the highest October interest payment on record it remains less than the highest recorded monthly payment of 7.2 billion in April 2017.

This increase in debt interest payment is largely due to the movements in the level of the Retail Prices Index (RPI).

Public sector net borrowing was higher than expected in October: 8bn vs 7.1bn consensus driven by higher interest payments of 1.2bn

10.01am GMT

The big picture from today's public finances is that the UK national debt continues to grow.

The Office for National Statistics says:

Public sector net debt (excluding public sector banks) was 1,790.4 billion at the end of October 2017, equivalent to 87.2% of gross domestic product (GDP), an increase of 147.8 billion (or 4.5 percentage points as a ratio of GDP) on October 2016.

10.00am GMT

9.49am GMT

This is the first time since June that Britain's monthly deficit has risen year-on-year.

This chart shows borrowing this financial year (dark blue) compared to 2016-17 (light blue).

9.42am GMT

The jump in Britain's deficit to 8bn last month highlights the 'headache' facing chancellor Philip Hammond ahead of Wednesday's budget, say Reuters.

Here's their first take:

Britain's budget gap unexpectedly widened last month, underscoring finance minister Philip Hammond's challenge as he juggles calls for more spending in his budget on Wednesday with the prospect of weaker economic growth ahead.

The deficit, excluding state-run banks, stood at 8.0bn, up 6.9% compared with October 2016, the Office for National Statistics said on Tuesday.

9.34am GMT

Breaking! Britain's deficit was bigger than expected last month.

The UK borrowed just over 8bn to balance the books in October, up from 7.56bn in October 2016 (that excludes the impact of Britain's state-owned banks)

Ooops! UK Public sector net borrowing (excluding public sector banks) increased by 0.5 billion to 8.0 billion in October 2017, compared with October 2016.

9.25am GMT

Stand by your desks! UK Public Finance data is up in 5 minutes... #GBP

9.25am GMT

In the City, shares in budget airline easyJet have soared to the top of the FTSE 100 leaderboard, after it reported a surge in bookings.

EasyJet may be profiting from the collapse of rival Monarch, and Ryanair's recent pilot shortage.

EU Movers:

easyJet +2.7%
Babcock +2.3%
ITV +1.9%
SSE +1.8%
Enel +1.2%
Compass Group -5%
Johnson Matthey -1.9%
Kingfisher -1.5%

9.10am GMT

Global investors seem to have shaken off the German election crisis.

Asian stocks hit a 10-year high overnight, with traders citing optimism over the strength of the global economy.

Where have all the Rogue Traders gone? Markets at highs, lots of self congratulation, complacency rife. More than likely one out there somewhere!

8.56am GMT

Even if October's public finances do beat expectations this morning, Britain's long-term borrowing needs are still worryingly high.

Economists at JP Morgan say Philip Hammond will be batting on a 'sticky wicket' tomorrow, as the independent Office for Budget Responsibility (Britain's fiscal watchdog) may revise down its growth forecasts. That will have a nasty impact on how much tax revenue the government might take in over the coming years.

Next week's budget will be significant for both economic and political reasons. The OBR is set to downgrade its view of potential growth significantly, forcing the Chancellor to pencil in either more borrowing or more austerity-a particular challenge given the domestic political backdrop.

The government lacks an overall majority and is under pressure to increase its financial offer ahead of the mid-December EU summit. The Chancellor is also under pressure to use fiscal policy to offer support to key parts of the electorate amid an ongoing real income squeeze, addressing these concerns while ensuring his budget has enough support in Parliament to pass.

8.40am GMT

This chart shows how the UK monthly deficit has fluctuated over the last two years:

8.04am GMT

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

We expect the public sector net borrowing requirement measure of borrowing to continue to undershoot the OBR's forecast, providing some good news ahead of the Chancellor's Autumn Budget on Wednesday. Indeed, we have pencilled in borrowing of 7.0bn in October, just below last year's outturn of 7.5bn, leaving cumulative borrowing 7% lower than last year.

However, this will probably be overshadowed by downward revisions to the OBR's forecasts for economic growth and therefore the medium-term outlook for the public finances.

Although Brexit uncertainty hangs over the UK's long-term outlook, the economy continues to hold up well. Healthy tax receipts so far this year will likely lower projected borrowing modestly in the near term. The Chancellor ought to use this boost to finances to make a stronger commitment to budgetary discipline.

Unfortunately, the political barriers between Hammond and this sensible route forward are probably too large.

European market opening call @LCGTrading $FTSE +5 points at 7394$DAX +8 points at 13066$CAC +5 points at 5345$IBEX -2 points at 10023

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