A departure from the EU with a Brexit deal in place could see a ‘deal dividend’ of £26.6bn made available for spending later this year, chancellor of exchequer Philip Hammond said in Wednesday’s Spring Statement. 
More of an update on the economy than an insight into the government’s spending plans for the year ahead, the statement contained few details of new outlays.
Despite the uncertainty hanging over it, the economy remains “remarkably robust”, the chancellor (pictured) said, pointing out it has grown for the past nine consecutive years and is expected to grow in each of the next five.
“Despite the slowing world economy, the OBR expects Britain to continue to grow in every year of the forecast,” he said.
“At 1.2 per cent this year, both the International Monetary Fund and the OECD are forecasting the UK to grow faster than Germany; then 1.4 per cent in 2020, as forecast at the Budget; and 1.6 per cent in each of the final three years.”
Real GDP growth forecast
As well as further economic growth, Hammond said the OBR also expects unemployment and borrowing levels to fall.
The biggest news from the statement was that £26.6bn could be made available for spending later this year in areas that most need it. However, the chancellor warned it was conditional on a Brexit deal being reached.
“If we leave the EU with a deal and an orderly transition to a future economic partnership, we will see a deal dividend: an economic boost from recovery in business confidence and investment, and a fiscal boost from a reduction in the minimum necessary level of fiscal headroom once the risk of a no-deal exit is removed,” he said.
However, he warned that progress made so far could be at risk with a disorderly, no-deal exit from the EU.
“Leaving with no deal would mean significant disruption in the short and medium term and a smaller, less prosperous economy in the long term than if we leave with a deal,” he explained.
“Higher unemployment, lower wages and higher prices in the shops are not what the British people voted for in June 2016.”
Paul Dales, chief UK economist at Capital Economics, said that the Spring Statement “was always going to be a sideshow” to key votes on the path of Brexit, although there was some good news with the so-called ‘deal dividend’.
Spare funds had been found thanks to more favourable economic assumptions, including upward revisions to wage growth and employment growth among high-income earners, according to Dales.
However, the economist said it would only be available should a deal be agreed, adding: “If there’s a ‘no deal’ Brexit, the spare funds disappear.”
“Overall, if parliament votes for a Brexit deal it will be rewarded with a ‘deal dividend’ that can be spent on public services,” he said. “If there’s no deal, then there’s nothing to spend.
“Of course, promises on future spending are only good if Hammond is around to honour them. Given the current political instability, he may not be.”
The chancellor warned that as well as affecting growth, a hard Brexit could have a potentially adverse inflationary impact.
“Our economy is operating at near full capacity, so any fiscal and monetary response would have to be carefully calibrated not to simply cause inflation, compounding the effect of any movement in the exchange rate on the price of goods in our shops,” noted Hammond.
Inflation forecast
This was the main point for Quilter Investors portfolio manager Helen Bradshaw.
“Although some inflation is crucial in a well-functioning economy, with falling prices risking a stagnation in spending, it is a careful balancing act,” she said.
“The chancellor warned that although disruption is likely if the UK exits the EU without a clear agreement, the scope for deploying monetary and fiscal tools to stimulate the economy may be limited.”
Hammond, the manager said, is fearful of the potential for a fall in sterling and the knock-on effect on prices of imported goods, alongside the inflationary effect of accommodative monetary and fiscal policy which has defined the post-global financial crisis period.
As such, there was likely to be only limited room for further stimulus, which would need to balance against inflation worries.
“Were there to be an inflationary impact from Brexit, it is possible the Bank of England may view that as a tolerable short-term phenomenon,” the portfolio manager explained. “But if it were to become an issue longer-term, then the Bank would have to consider rate rises to stick to its inflation targets and maintain economic equilibrium.”
Bradshaw said a globally diversified portfolio would help protect investors against Brexit risk, while alternative assets such as infrastructure can offer inflation-linked cashflows and floating rate instruments would benefit from rising rates.
Elsewhere, the positive economic backdrop could be a good sign for equity investors, as international investors continue to avoid the UK market over Brexit fears, driving prices down.
“While the economic picture is positive, stocks have struggled more recently as Brexit looms,” said Alex Neilson, investment manager at Investec Click & Invest.
Performance of FTSE All Share since EU referendum
Source: FE Analytics
“Uncertainty surrounding the UK’s departure from the EU has driven UK equities to levels not seen for six years, even as the UK economy has improved, with real wages beginning to grow and record high employment,” he said.
“Such favourable underlying conditions, combined with prevailing negative sentiment, means UK stocks offer some of the best-value equity investments in the world, especially for long term investors.”
A soft Brexit should see sterling appreciate, reducing costs for domestic-focused stocks, while the ‘deal dividend’ would also benefit small- and mid-cap companies.