Election Result is Economy Positive… For Now

Nigel Owen

Head of Corporate Origination
Tuesday, Jul, 09, 2024
3mins

Reams and reams will be written in the coming days, weeks, and probably months about what the political ramifications are of the result of the UK General Election. What I’ll try to start with here is to stay on the path of looking at what effect the result might have on the economy, although it’s impossible to entirely separate the two.

The first, simple answer is not a lot changes. The key phrase however that I will add to that is “for now”. The result was expected from long before the election was called, so the snap nature of it didn’t affect markets. If markets like anything, it is stability and a lack of surprises. So, the Labour party achieving what the polls had been saying, kept surprises off the trading agenda, and the convincing margin suggests a degree of stability… for now.

The key date for the first possible adjustment in that stable environment and unsurprising outcomes will be that of the first budget Keir Starmer’s government will deliver. The party’s manifesto was, probably deliberately, light on detail. However, when you come to power, you then have to give more clarity on how much you’re going to spend, how quickly, and, most importantly, how you’re going to fund that.

There is some clever accounting that accountants smarter than me suggest could release as much as £40bn of funding. However, while the man on the street who voted Labour (or any other party frankly) won’t bother with the detail of accounting jiggery-pokery, markets will. And if Starmer is to learn anything from recent Conservative governments, it should be the reaction of markets to Liz Truss’s attempt at economic revolution. Lose the trust of the market and your economic plans will be in turmoil. Starmer at least starts with the trust of markets, for now.

Even with clever accounting and targeted increases in the tax take that will appeal to their voters, it seems inconceivable that Labour will be able to achieve their stated aim of 2.5% growth and keep promises such as building 1.5m new homes without increasing borrowing, which will bring the UK fiscal rules under pressure. With a 60-year high debt-to-GDP ratio and a 70-year high tax burden, it wouldn’t be a surprise if one of the first moves of the new chancellor is to revise those rules. It would be easier to do that earlier in your tenure than later. So watch for that.

Help from the EU

One unexpected boost that the UK could receive early in the new Labour government may, ironically, come from France’s election delivering a muddled result. The hung parliament outcome with the left-green alliance holding the most seats is expected to see Macron’s market-friendly reforms halted and attempts to cut France’s debt reversed, if only by the fact it doesn’t look obvious how parties will agree to work together to get such matters agreed.

That couldn’t come at a worse time for the ECB as it is likely to need to recommend France and six other EU countries take corrective action to bring their deficits and debt-to-GDP ratios back within the bloc’s fiscal rules. The ECB is likely to want to deal with it ‘in-house’ but the problems of dealing with a leading alliance with far from a majority may force the dealings more out into the open, causing more uncertainty and lack of confidence in EU markets… giving Keir Starmer a chance to offer the UK as a viable investment alternative.

Global trumps local

A pet frustration of mine in recent months has been parties in opposition criticising those in power for allowing inflation to get out of hand, and then parties in power trying to take credit for bringing inflation back under control. The reality is global influences have had much bigger effects on the rise and subsequent fall of inflation and the requirement for Central Banks to move rates accordingly. The only two countries where this holds any weight are China and US, given their size and effect on the global economy.

And hence why the outcome of the US election in the autumn may have more overall effect on both the UK and the EU than either of this week’s elections. Trump is widely expected to be best for the US economy, but at a cost to the rest of the world with regard to import tariffs and subsidies for US companies. Both of these are likely to work for a short-term boost to the US economy and maybe portray another four years of Trump presidency as an economic success, but at what cost in the medium-term.

And I know I said at the start I would try to avoid analysing the political effects, so I will leave it on this point. I said economies and markets like stability and stakeholders delivering on promises. What the economies discussed here need more than anything is for whichever parties win to deliver medium-to-long-term achievable growth plans, electorates to allow them to deliver on those plans, and opposition to hold their feet to the fire if they don’t deliver.  

*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.

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