The Labour Party's delivered an historic election victory, with just 34 per cent of the national vote, the lowest-ever winning share. Since then, we have seen the UK move into a more stable environment, whilst politics across the pond and on the wider continent have proved more volatile. Both French and US politics have been producing shocks. A welcome dullness is appreciated by UK investors after the volatility that has loomed over British politics ever since the 2016 Brexit vote.
The public’s widespread acceptance of the country’s poor finances helps explain why Sir Keir Starmer’s expectations are so tempered. We have government debt to GDP standing at 98%, with a tax burden equal to that following the Second World War. The Labour Party has ruled out increased public spending to fix struggling public services, remedy the country’s inadequate infrastructure, and boost productivity. Instead, it will stick to the Conservatives’ spending plans, and meet their rule that debt as a percentage of GDP must be lower after the five-year parliamentary term. Having marketed themselves as fiscally restrained, it seems likely the new government will abide by these spending controls.
The UK is experiencing a productivity slump, seeing little growth in output per worker since the financial crisis. Total factor productivity – a measure of how efficiently resources are used in an economy – was last year only 1.7% above the level recorded in the financial crisis in 2007. However, we are seeing supportive economic data that the UK is improving.
First, the headline Consumer Price Index (CPI) inflation rate hit the Bank of England’s 2% target in May, the first time in three years, and is below the US and the Eurozone. Albeit, core CPI, an indicator that strips out food and energy, remains stickier, coming in at 3.5% in May. This is due to persistent price pressures in the service sector.
Second, with inflation muted, interest rate cuts are now on the agenda. Yes, the markets believed that the Bank’s Monetary Policy Committee (MPC) would go strongly in favour of a rate cut when they saw inflation start to come down. And yes they have kept rates at a current 16-year high since August last year, voting 7 to 2 at its last meeting to keep it unchanged. However, with recent strong results, a cut over the summer would likely put the UK ahead of the Federal Reserve’s rate-cutting cycle (a fairly rare phenomenon).
As we look ahead to the rest of the year, there are grounds for optimism towards UK assets: falling inflation, the potential for interest rate cuts, improving sentiment, and the hope of political stability should all help to calm markets.
The value of securities and their income can fall as well as rise. Past performance should not be seen as an indication of future results. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
