I know you are as keen for this general election to be over as I am, and that you are probably not expecting Friday morning to mark the dawn of a bright new era. We have all learnt that you can have too much of politicians and that reputations can be lost, or diminished, as well as enhanced.
There is still a possibility, of course, that the election could throw up something really destabilising. Two years ago a hung parliament with the Tories as the largest party was the expected outcome. Now it would be greeted as a catastrophe, not least for the prime minister.
Combine a hung parliament with Brexit and you compound the uncertainty, though it could push the country towards a softer Brexit. The narrowing of the polls has been driving currency markets, and sterling, in recent days, but the markets are still assuming a Conservative majority.
If that turns out not to be the case we can expect a much bigger market reaction, though Simon Derrick, veteran chief markets strategist at BNY Mellon, points out that markets are not always averse to hung parliaments and coalition governments over the medium term.
Sterling was stable when Labour lost its majority in 1977. It fell briefly, by about 5%, after the May 2010 election that failed to deliver a Tory majority, but reached its low a week after the election, a low that was to last several years. It recovered when the Conservative-Liberal Democrat coalition was formed. As Derrick puts it: “Neither a minority government nor a moderate coalition is an automatic negative for the pound.”
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Those episodes did not, however, have the additional huge complication of Brexit. As in recent months, we can expect sterling to be a Brexit barometer. For the moment, to repeat, the assumption in markets is of a Tory majority this week, though there is not a great deal of enthusiasm for it.
The election is just the latest hurdle for the economy, and business, to negotiate. It is a reminder that these things are never as straightforward as they appear. This was, after all, expected to be a cakewalk for Theresa May.
The tone and content of economic policy in the coming months is important. There have been times in the recent past when rebalancing the economy was regarded as desirable. Now it is essential, if the economy is not to stand or fall on the shoulders of debt-laden consumers, as I touch on below.
For business, this has been a sobering time. Its strong majority view that it was best for Britain to stay in the EU was rejected by voters a year ago. It has seen, if the polls are anywhere near correct, a sizeable minority of voters happy to see significantly higher corporate taxation and raised taxes on executive salaries.
It has had little comfort from the Tories, who under May have adopted an interventionist, anti-business tone, as highlighted in these pages. Our business manifesto today sets out some ideas for how the Tories could undo the damage.
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Amid all this, businesses have been on something of a rollercoaster. One measure of confidence, the Lloyds bank business barometer, showed confidence slumping last summer, then embarking on a jagged recovery, before slumping again last month.
The 20-point drop in overall business confidence, driven by a big fall in firms’ perceptions of business prospects, may be temporary, suggest economists at Lloyds Bank Commercial Banking, which publishes the survey.
Another survey, the European Commission’s economic sentiment index, also pointed to a drop in confidence last month, particularly in construction and services. The latest purchasing managers’ index for manufacturing, though down slightly last month, showed sentiment in the sector holding up. The construction industry is doing well.
For businesses to hold up the economy as well, investment and exports will be vital. Business investment has been up and down over the past 18 months. It rose a little in the first quarter, perhaps surprisingly, but has essentially been flat. The recent pattern, in which firms have been happier to recruit than to invest — good for jobs but bad for productivity — persists.
As for exports, we reported last week the disappointing first-quarter gross domestic product figures, which showed that in spite of sterling’s devaluation and a stronger global economy, including a pick-up in Europe, export volumes were down 1.6% on a year earlier. Whether this continues to be an unsuccessful devaluation we have yet to see. Surveys remain upbeat for manufacturing exports, though some service-sector exports are under a cloud.
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It is sometimes forgotten that exports cannot be turned on at the flick of a switch. Developing new markets, and exploiting existing ones, requires investment, sometimes considerable investment. Doing that when future trading arrangements are so uncertain presents, to say the least, a big challenge.
The unexpected uncertainty created by the election, together with the tenor of the campaign, has created new concerns for business and led to some of the drops in confidence we have seen. The great rebalancing has yet to happen.
“It is sometimes forgotten that exports cannot be turned on at the flick of a switch
The election uncertainty will give way to new uncertainties. Two new reports from the Centre for Economic Performance (CEP) at the London School of Economics highlight some of the dangers. On immigration, the CEP concludes that cutting it significantly will result in a lowering of living standards for the UK-born population, with the extent of the fall depending on the extent of the drop in net migration. The May target of “tens of thousands” will leave us all poorer.
The report, on the CEP website, is a good mythbuster. Areas of high EU immigration have not seen UK-born workers displaced or suffered from weaker wage growth. The route to reduced living standards is partly via the fact that migrant workers pay more in taxes than they take out in welfare and use of public services.
The CEP’s other report looks at something that really worries businesses — the prime minister’s “no deal is better than a bad deal” rhetoric. CEP economists Swati Dhingra and Thomas Sampson, using what they describe as a state-of-the-art trade model based on comprehensive data, say that leaving the EU without a deal would result in a 40% drop in exports to the EU over 10 years and a 3% fall in GDP per capita. Add in dynamic effects and the medium-term economic effects could be double those arising from the model, the authors say.
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This leaves aside the immediate dislocation, which would be considerable, of leaving the EU without a deal, which I shall discuss in a future piece. The combined effect would be large and damaging enough to suggest that it is not a serious option for the government, even though the prime minister insists it is.
Maybe, once the election hubbub has died down, wiser heads will prevail and wiser words emerge. We can but hope.
PS Never let it be said that I whet your appetite and then leave you hungry. Three weeks ago I wrote here about rising household debt and how it is causing concern, including in official circles. Now we have a bit more information.
Bank of England figures a few days ago showed that household debt rose £4.3bn in April to a record high of £1,532.2bn. The latest rise was a little bit below the six-month average of £4.8bn, suggesting a degree of moderation is taking hold. Most of that moderation, though, came in secured debt, or mortgage borrowing — the increase in mortgage debt dropping by £0.4bn on the month, and mortgage approvals falling again to 64,645 in the month, reflecting the slowdown in the housing market. Nationwide building society said on Thursday that house prices fell for a third successive month in May, pushing 12-month house-price inflation down to 2.1%. Unusually, general inflation, at 2.7%, is higher than house-price inflation.
However, there is still a lot of exuberance in unsecured credit — consumer credit. Its annual rate of growth picked up from 10.2% to 10.3% in April, driven by a worrying-looking jump in the annual rate of credit card borrowing from 8.9% to 9.7%. I am still old-fashioned enough to think that any borrowing on credit cards is unwise.
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The question remains about how much consumers will borrow their way through the squeeze on real incomes and falling real wages. Retailers would love it if they did. The rest of us would and should be rather more concerned.
