A short while ago a struggling Labour Party was unable to land a meaningful blow on an unassailable Conservative government led by Boris Johnson and his chums. How things have changed!
Over the last few weeks most of the questions I’ve been asked were based around whether an incoming Labour government will be catastrophic for shares, bonds and the pound. Markets hate uncertainty, but as the result of yesterday’s vote was probably the biggest forgone conclusion in electoral history, they’ve hardly budged. First thing this morning the pound is flat, the FTSE 100 is flat and UK bond yields are, you guessed it, flat!
In fact, markets haven’t changed much since the British public and investors came to terms with the likelihood that the next government would be formed by Sir Keir Starmer. The relative calm with which investors have accepted the inevitability, and then actuality, of a new Labour government with a large majority is firstly because Liz Truss’s 2022 government disavowed voters of the view that the Tories are the party that can be trusted with the economy, and secondly because people are tired of eight years of unstable British politics. This morning, we are the envy of the Americans and the French because the UK looks like a beacon of stability in a world where populism is on the rise.
That optimism for Britain’s prospects is not misplaced. Government debt to Gross Domestic Product (GDP) presently sits at around 100%, which is roughly in line with its long-term average. It was much higher in 1822 (194%) and hit a peak in 1946 at 259%. Rachel Reeves, our new Chancellor, has more scope to loosen the country’s purse strings in the interest of rebuilding public services and kick-starting growth than she lets on.
Productivity improvements, which have been largely absent post the Global Financial Crisis are likely to improve because UK and overseas investors will be more confident about investing their money here now that they can look forward to a period of stability. In fact, UK families are saving more which means there is more domestic money available for finding its way into productive projects. Starmer and Reeves would do well to harness this.
Finally, and this will be a little controversial, our workforce has been boosted by immigration which, historically, is a very positive sign because displaced people try to make new lives in the very best countries. North Korea, Russia, Iran and Iraq have no problems with immigration!
The biggest danger that Labour faced in this election was winning with a relatively small majority, which would have meant it was held to ransom by its hard left. A large majority means that Starmer and Reeves can confidently go ahead with their economic policies of boosting growth and productivity. There is lots of low-hanging fruit here, one of which is to reform local planning laws and get more houses built. That would be a very big boost for the UK economy and great for youngsters trying to get on the housing ladder. This has not escaped the attention of Labour’s deputy leader, Angela Rayner.
All in all, this electoral outcome is not bad for UK markets, mainly because the bar has been set so low by recent governments – as Tony Blair’s New Labour said in 1997 “Things can only get better” – this time round I think that’s right.
