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UK stocks higher as Rishi Sunak unveils budget and stronger UK economy forecasts

Tom Belger
·Finance and policy reporter
·4-min read

Watch: Rishi Sunak begins Budget address in House of Commons

European stock markets were trading higher on Wednesday, as investors welcomed better-than expected industry data for the eurozone and economic forecasts for the UK.

UK stocks received a boost as chancellor Rishi Sunak unveiled the British government's tax and spending plans and the latest forecasts by the independent Office for Budget Responsibility (OBR).

OBR data now predicts the UK economy will expand by 4% this year and 7.3% next year, returning to pre-virus levels by mid-2022, six months earlier than previously expected. The OBR now predicts unemployment will peak at 6.5%, versus an 11.9% forecast last year.

Sunak announced £65bn ($91bn) new crisis support for businesses, workers and households, including extending the furlough scheme, £6bn business rate discounts for hard-hit sectors, and low-income and jobless benefit top-ups worth £500 a household.

Sunak also unveiled £5bn new 'restart' grants and a 'recovery' loan scheme with an 80% government guarantee for firms to replace previous loan schemes. Income tax thresholds will be frozen and corporation tax on larger firms' profits hiked to 25% from 2023 to reduce Britain's public deficit, however.

The FTSE 100 (^FTSE) closed the day 0.9% higher, while the FTSE 250 (^FTMC) ended 1.2% higher, with sectors worst-hit by the pandemic recording the largest gains.

Watch: Chancellor confirms extension of furlough scheme

Premier Inn owner Whitbread (WTB.L) and British Airways owner IAG (IAG.L) were among the biggest risers on the London Stock Exchange on Wednesday, up 5.5% and 6% respectively. Pub group JD Wetherspoon (JDW.L) closed 5.7% higher, and Cineworld (CINE.L) was 8% higher.

A stamp duty holiday will be extended and government mortgage guarantees will help some first-time buyers, boosting housebuilders and banking stocks. Developers Persimmon (PSN.L), Barratt (BDEV.L) and Taylor Wimpey (TW.L) were also among the biggest risers on the FTSE 100, each up more than 5%.

"The budget was more stimulative than expected in the near term," said Samuel Tombs, chief UK economist at Pantheon Macroeconomics. He noted the new stimulus measures added up to 3.1% of Britain's GDP last year.

READ MORE: Budget 2021: UK chancellor Rishi Sunak unveils recovery plan

Investors had appeared to shrug off or take the positives from Britain's services PMI figures earlier in the day, which showed most firms reporting declining trade but conditions stabilising and business optimism at a 14-year high.

Services PMI data also provided the latest signs about the toll of lockdowns on European economies. IHS Markit's bellwether survey showed most German and French services firms contracting, with a composite eurozone figure also indicating decline in trade. But the eurozone figure came in better than expected by analysts.

The DAX in Germany (^GDAXI) was up 0.3%, and the CAC (^FCHI) in France was up 0.4%.

Michael Hewson, chief market analyst at CMC Markets UK, said Britain's chancellor had recognised it would be "incredibly risky" to end support measures such as furlough grants and business rate relief any time soon.

Chancellor of the Exchequer, Rishi Sunak, walks from the Treasury to No 11 Downing Street, London, the day before delivering his budget. Picture date: Tuesday March 2, 2021.
Chancellor of the exchequer, Rishi Sunak, walks from the Treasury to No 11 Downing Street, London, the day before delivering his budget. Picture date: Tuesday March 2, 2021.

READ MORE: Rishi Sunak extends furlough scheme until September

"It is entirely right to be concerned at the level of the current deficit, however with borrowing costs still at fairly low levels, even after last week's rise in gilt yields, the government can afford to be creative when it comes to time frames in narrowing the gap between taxation and spending," said Hewson.

Tombs added: "The chancellor deferred announcing new fiscal rules until the autumn, creating uncertainty about whether additional tax rises will be needed in time."

US stocks were mixed as the European trading day came to a close. The Dow (DJI) was trading 0.3% higher, but the S&P 500 (^GSPC) lost 0.4% and the Nasdaq (^IXIC) was down 1.3%.

READ MORE: 125,000 UK employers have handed back £708m in furlough grants

Asian stocks had rallied overnight. China's SSE composite index (000001.SS) surged 2%, the Hang Seng in Hong Kong (^HSI) rose 2.7%, and Japan's Nikkei (^N225) closed 0.5% higher.

"Supporting this has been stronger February services and composite PMIs for many Asian countries," said Reid.

Watch: How to prevent getting into debt