Navigating economic uncertainty: Pre-election insights and economic outlook

In this article Phil Eckersley comments on recent economic news and pre-Election mood of the country.

They say a week is a long time in politics, the last few have seen a number of announcements likely to impact on the near term outlook for the economy.

Not least, the surprise announcement by the government that the country would be going to the polls on Thursday 4 July. In addition, there have been a slew of economic indicators, with the latest read on inflation providing a hint on the future path of interest rates.

And so to growth

After a strong start to the year, the latest data have been more mixed.  Retail sales, a reasonably reliable indicator of consumer confidence, remain in the doldrums. This is hardly surprising given the pressures on household incomes at the moment.  Neither the government nor the main opposition appear to be trying to court the general public with pre-election promises of significant tax give-always, over and above a few morsels that have already been pledged.  In more upbeat news, business investment has strengthened after a prolonged period of post-Brexit inactivity.  Businesses clearly have a long wish list of projects in areas like AI, environmental credentials, cloud technologies and compliance. That is, notwithstanding, the need to fund business expansion by investing in capital equipment etc.

What happens to growth in an election year?

In the build-up to previous elections, consumers typically postpone economic activity in lieu of the uncertainties, particularly “big-ticket” spending on durables. This time around the short nature of the build-up has probably had limited effect on spending.  Businesses typically see through “election fog” unless specific manifesto promises incentivise behaviours.  However, there doesn’t appear to be anything in the way of pre-election pledges that would cause firms to alter their planning in the current cycle.  In summary, UK growth is likely to continue on its current trajectory.

And inflation?

April’s CPI saw a drop in the annual number to 2.3%, but this was not as much as median market expectations.  The persistence of the services component of inflation combining with the core measure and underlying wage pressures have slowed the pace at which the headline rate is returning to the government-set target.  However, recent data such as the PMI suggested that price inflation continues to ease.  This was reinforced by the Bank’s Decision Maker Panel results that showed wage growth expectations slipping in the next 12 months.  The news on inflation is therefore mixed; it’s likely to remain above the 2% target on average in the near term

Monetary Policy

With polling day on 4 July , I find it inconceivable that the Monetary Policy Committee will reduce interest rates in the end June meeting.  Despite Monetary Policy being de-politicised by the decision to transfer responsibility to the Bank of England, there has never been a change of rates this close to an election.  This, coupled with the underlying persistence of inflation suggests, there won’t be a policy change until August at the earliest or more likely November… watch this space!