London stocks closed in the green on Wednesday as the UK Treasury watchdog halved its growth forecast and Chancellor Rachel Reeves committed to cuts to stick to her fiscal rules.
The FTSE 100 index closed up 25.79 points, 0.3%, at 8,689.59. The FTSE 250 rose 57.99 points, 0.3%, at 20,039.20, and the AIM All-Share climbed 0.37 of a point, 0.1%, at 693.81.
The Cboe UK 100 ended up 0.2% at 868.59, the Cboe UK 250 closed 0.3% higher at 17,513.59, while the Cboe Small Companies fell 0.4% at 15,550.34.
In her first spring statement, the Chancellor Rachel Reeves said her task is to secure Britain’s future with the world ‘changing before our eyes’.
The global economy has become ‘more uncertain’ and this demands an active government, one that ‘steps up, not steps back,’ she said.
Updated forecasts from the Office for Budget Responsibility showed the size of the challenge Reeves faces.
The OBR halved its growth forecast for the UK economy to 1.0% in 2025 from 2.0% before.
The OBR then expects gross domestic product growth to accelerate to 1.9% in 2026 as monetary policy eases, gas prices fall back and ‘slack in the economy is taken up’.
It expects growth to average 1.75% over the rest of the decade.
‘By the end of the forecast our economy is larger compared to the OBR’s forecast at the time of the budget,’ Reeves said.
Inflation will average 3.2% in 2025, Reeves said, compared with the OBR’s previous forecast of 2.6%. It will then average 2.1% in 2026, and return to the Bank of England‘s 2% target in 2027.
Reeves said there would be no further tax hikes in the spring statement.
The OBR’s updated forecasts showed a government deficit of £4.1 billion by fiscal 2029-30, wiping out the chancellor’s fiscal headroom.
Reeves said actions taken Wednesday would restore the headroom in full, moving from a deficit of £36.1 billion in fiscal 2025-26 before moving into surplus of £9.9 billion in fiscal 2029-30.
Bond markets reacted relatively calmly. At the time of the London equity close the yield on the UK 10-year gilt was 4.74%, the level seen before the spring statement.
Kathleen Brooks at XTB said the statement passed ‘without too much drama’ in financial markets.
‘The devil is always in the detail, and some of the detail in the statement and the growth forecasts make for uncomfortable reading. The UK is not out of the woods yet, but it could, finally, be moving in a slightly better direction with a degree of stability in the public finances and a low bar for growth this year.’
But the Institute for Fiscal Studies’ director Paul Johnson cautioned that: ‘If you are going to have ’iron-clad’ fiscal rules then leaving yourself next to no headroom against them leaves you at the mercy of events.’
‘We can surely now expect 6 or 7 months of speculation about what taxes might or might not be increased in the autumn,’ he added.
ING agreed.
The chancellor can ‘breathe a sigh of relief that gilt yields haven‘t risen any further after these latest announcements. But the relief is likely to be short-lived; tough decisions are looming in the autumn.’
‘At some point, the OBR is probably going to have to throw in the towel and cut back its forecasts. And if it does this at the autumn budget, that will further reduce the money available under the fiscal rules.’
The chancellor’s statement on Wednesday followed better news on UK inflation, although economists warned it is the ‘calm before the storm’.
Consumer price index inflation stood at 2.8% on-year in February, according to the Office for National Statistics, decelerated from 3.0% in January and lower than the 2.9% market consensus cited by FXStreet.
Core CPI, which excludes energy, food, alcohol and tobacco, rose by 3.5% in the year to February, slowed from 3.7% in the year to January and lower than an FXStreet-cited consensus of 3.6%.
Closely watched services inflation remained sticky however, holding steady at 5.0%, compared with hopes for a small drop.
The ONS said the largest downward contribution to the monthly change in CPI annual rates came from clothing.
Simon French at Panmure Liberum said the figurers were ‘encouraging’ and keep a May interest rate cut ‘in play’.
But he noted the data is the ‘calm before the storm,’ pointing to looming big price effects which kick in during April, such as national insurance, business rates, utility bills, national living wage and tariffs.
Deutsche Bank’s Sanjay Raja agreed.
‘Make no mistake, inflation remains on a one-way journey: up. We see headline CPI rising to just under 4% year-on-year later this year,’ he said.
‘The [Monetary Policy Committee] have taken notice – one reason they opened the door to a potential pause in May. The good news is that today’s data should provide the [Bank of England] a path to continue with its gradual dial down of restrictive policy. We continue to think a May rate cut is more likely than not.’
The pound was quoted lower at $1.2894 at the London equities close on Wednesday, compared to $1.2955 at the close on Tuesday.
The euro stood at $1.0788, down against $1.0811.
Against the yen, the dollar was trading higher at JP¥150.53 compared to JP¥149.73 late Tuesday.
Stocks in New York were mixed at the time of the London equities close. The DJIA was flat, the S&P 500 index 0.7% lower, and the Nasdaq Composite down 1.5%.
In European equities on Wednesday, the CAC 40 in Paris ended down 1.0%, while the DAX 40 in Frankfurt fell 1.2%.
On the FTSE 100, Shell rose 2.4% on further consideration of Tuesday’s Capital Markets Day.
‘The investment case remains compelling, through a combination of portfolio simplification, capex discipline and self-help driving improved returns, while Shell’s fortress balance sheet allows for sector-leading shareholder returns,’ said RBC Capital Markets.
Defence stocks were buoyed by confirmation of defence spending hikes in the spring statement.
The UK government will put an extra £6.4 billion into defence spending by 2027, Reeves said, confirming an additional £2.2 billion for the Ministry of Defence in the next financial year.
Vowing to make Britain a ‘defence-industrial superpower’, the Chancellor said a minimum of 10% of the MoD’s kit budget will be spent on novel equipment, including drones and AI-enabled technology.
BAE Systems rose 0.6% while Babcock International advanced 2.3%.
Babcock was further boosted by signing a 5-year contract extension with the UK Ministry of Defence.
Babcock said it will provide a comprehensive range of support capabilities for the Army in the UK with global reach.
It said the total contract is worth £1.6 billion, including around £1.0 billion of revenue to be taken into Babcock’s contract backlog and about £600 million delivered as agent.
Elsewhere, retailer Next was in fashion, rising 1.8%, ahead of full-year results on Thursday.
Meanwhile, Ocado leapt 15% as JPMorgan upgraded to ’overweight’ from ’neutral’.
The broker highlighted several reasons to be more optimistic, including the rising possibility of new deals in its Solutions operations, improving margins and an attractive valuation.
Brent oil was quoted higher at $73.95 a barrel at the London equities close Wednesday up from $72.98 late Tuesday. Gold firmed to $3,018.09 an ounce against $3,011.44 on Tuesday.
Thursday’s UK corporate calendar has full-year results from retailer Next.
The economic calendar for Thursday has US initial jobless claims and quarterly personal consumption expenditures and GDP figures.
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