Exploring the UK Election - Landslide or Sandslide?
Tony Redondo ACIB
Founder-Director of Cosmos Currency Exchange??Multi-Award Winning Foreign Currency Exchange Expert ?? Providing Cost Effective Foreign Currency Conversion & Payment Solutions For Commercial & Private Transactions
Bloomberg’s head of media David Merritt said on Bloomberg TV on Friday morning, there is a chance this is a ‘sandslide not a landslide’, a big result, but one that could as easily be washed away as many commentators compare it to Boris Johnson’s 2019, 80-seat win, “a mile wide but an inch deep.”
In his first remarks as Prime Minister, Sir Keir Starmer said his government will be one of “service”. Speaking outside 10 Downing Street, Starmer said “I say to you directly: “Whether you voted Labour or not, in fact, especially if you did not, I say to you directly: My government will serve you.”
Labour’s share of the vote is only 34% but it won 63% of the seats. Starmer’s predecessor Jeremy Corbyn won 32% of the vote in 2019 but only won 31% of the seats. The vote share-to-seat ratio in the smaller parties shows the Liberal Democrats won 12% of the vote but 71 seats whilst Reform won a bigger share of the vote, 14% but only 5 seats.
According to Deutsche Bank analysts, the combined vote share of the two main parties was just 57.4%, which is the lowest share since 1918, when the Labour Party actually became a proper electoral force. In other words, it’s the lowest share ever.
Labour’s share of the vote is the lowest of any governing party since 1923, and the lowest for a majority government since the Acts of Union in 1800.
Currency Exchange Rates Update
Against the Euro, the Pound climbed to a 22-month high on 14 June, then lost over 1% of its value by 1 July before picking up 0.3% of this loss by the end of last week.
Against the US Dollar, the Pound Sterling finished the week at a 3-week high and a 2-week high against the Canadian Dollar.
What’s in the news?
UK
An interest rate cut announcement by the Bank of England (BoE) in August appears to be on a knife edge after a ‘nuanced’ BoE survey which shows inflationary pressures continued to ease in June, but progress may slow in the coming months.
The survey also showed continuing progress on wage growth with the expected wage growth in June over the following year continued to edge lower to 4%, down from 4.1% and the lowest level since May 2022.
Wages growth is a major concern for the Bank, with policymakers concerned that stubborn wage growth could keep cost pressures elevated in the labour-intensive services sector.
Inflation fell to 2% in May but there are still signs that underlying cost pressures remain elevated, particularly in the services sector.
The BoE left interest rates on hold in June, but the minutes showed the decision was “finely balanced”.
A money markets trader has placed a ￡2m bet on the BoE making the biggest interest rate cut in four years next month after inflation fell back to its 2% target.
The BoE next meet on 1 August.
Good news
Simon French of investment bank Panmure Gordon says that whilst Britain’s debt-to-GDP situation is not ideal, sitting at nearly 100% but in fact, of the G7 economies, only Germany has a better-looking debt picture. Canada, France, the US, Italy and Japan are all worse.?
With inflation dropping to 2% in May, the burden of servicing this debt (paying the interest) has fallen sharply too in the last 18 months or so, because of the large proportion of index-linked bonds the UK has in issue.
Not an ideal situation but relative to other countries, the UK looks better, and relative to recent history, the debt trajectory is less unsustainable. None of this means that the Starmer government can ignore it, but it’s not a screaming emergency and there’s no reason to expect an imminent run on the pound.
Even more encouraging is the state of UK consumer balance sheets. Since the credit catastrophe of 2008, British households have significantly deleveraged (reduced their debt relative to their assets). In 2008, consumer debt (mortgages, loans and credit cards) totalled ￡2.2 trillion, while cash balances stood at ￡1.5 trillion. In other words, a ￡700 billion gap. Now those balances are roughly equal, with ￡1.85 trillion of each as avers are getting a real interest rate on their savings for the first time in over a decade and mortgage holders who know their mortgage will need to be refinanced at a much higher rate in the next 12 months or so are preparing for this.
Growth in the UK’s manufacturing sector slowed in June according to the latest S&P’s purchasing managers’ index (PMI) for the manufacturing sector, but the sector remained in expansion despite facing stubborn cost pressures.
The S&P PMI index registered 50.9 in June, down from May’s 22-month high of 51.2. Any measure over 50 indicates expansion.
The survey showed that output and new orders expanded for the second successive month, with levels remaining close to May’s level.
One of the Big Four Accountants, KPMG reports the UK economy ‘turning a corner’ as global growth slows and predicts that the UK economy is set to sail past expectations over the next two years as falling inflation and an increase in consumer confidence help fuel growth.
The ONS (Office for National Statistics) reported that UK GDP grew faster than expected in the first quarter of 2024 recording growth of 0.7% between January and March.
This is the fastest pace since 2021 and the highest of any G7 countries.
Not so good news
The IFS (Institute of Fiscal Studies) has described the UK’s fiscal outlook as “parlous” with the exchequer still recovering from the government’s decision to turn on the taps in response to consecutive major economic crises (Coronavirus, the war in Ukraine and its effect on energy prices).
During the general election campaign, the IFS accused both the Conservatives and Labour of engaging in a “conspiracy of silence” over tax, with neither willing to grasp the nettle.
Analysts at the investment bank Citi are predicting that new Chancellor of the Exchequer Rachel Reeves will launch a ￡15bn tax raid on pensions, capital gains and inheritance this autumn.
The S&P purchasing managers’ index (PMI) for the services sector fell to 52.1 in June, a seven-month low and down from 52.9 in May due to election uncertainty knocking business activity in the services sector last month. PMIs measure business activity in the private sector with anything above 50 indicating expansion.
Senior travel industry figures have expressed alarm that many smaller airports across the EU have so far failed to install fingerprint technology that is set to be activated in October.
Under the so-called European Entry/Exit System (EES), all British nationals travelling to the EU will have to have their biometric data taken upon crossing the border for the first time. British tourists often land in regional airports in holiday destinations across the continent that can be relatively empty much of the year. Airline bosses fear many of these smaller airports have not prepared for the new rules.
USA
President Joe Biden is battling to save his presidential campaign after facing a week of calls for him to stand back from the race after he fumbled the first presidential debate against Donald Trump.
It has since emerged that Biden is planning to clock off work every day at 8pm to protect his health and admits he “fell asleep on stage” with Trump.
The odds on a second term for the incumbent president have plunged by 32% since his shaky appearance according to the political betting website PredictIt.
Behind the scenes, Democrats are already planning how he could pass the nomination to Kamala Harris or hold an “open convention” in August to choose a replacement.
The next debate between the two men vying for the Presidential status will be on 10 September.
The Supreme Court split 6-3 along partisan lines to rule that presidents cannot be prosecuted for actions that fall within their “core constitutional” roles. Trump hailed the ruling as a “big win for our constitution and democracy”.
The decision largely erased any chance Donald Trump will face trial before the Presidential election vote on 5 November for the Jan. 6 attack on the US Capitol and his alleged effort to keep power after losing the 2020 election.
US hiring and wage growth fell in June while the jobless rate rose to the highest since late 2021 bolstering hopes that the Federal Reserve will begin cutting interest rates in the coming months. The US economy added 206,000 jobs in June, but the unemployment rate rose to 4.1%.
For the first time in its history, the S&P 500 stock exchange index on Wall Street closed above 5,500 last Tuesday to extend the 2024 rally. It was the index’s 32nd record this year. The Nasdaq 100 index hit the 20,000 mark, also notching a record high.
The EU
France has voted for a hung parliament, not granting any one party the numbers needed to form a majority in the National Assembly. The Left-wing coalition, with radical Jean-Luc Mélenchon, a 72-year-old left winger who is anti-euro and aspires to tax the wealthy, increase the minimum wage and cut the pension age. He wants to open the spending flood gates received the largest number of seats.
Just to recap, after the first round of voting Marine Le Pen’s RN won 33.5% of the vote; not enough for an outright win. However, in the final round of the French election, the Left-wing New Popular Front has won the biggest share of the seats, followed by Macron's Ensemble coalition, with Le Pen's National Rally pushed into third place following a pact between left and centre candidates that saw hundreds drop out of the race to avoid splitting a vote against the National Rally with voter turnout the highest since 1981.
President Macron has simply swapped compromise with one ‘extremist’ group for another and is not really in control of the events he unleashed. The markets see a scenario where if the far left is calling the shots and all the hard-won pro-business reforms that Macron fought for could be rolled back. That would be disastrous for the country’s finances and investors hate surprises.
The nightmare scenario is that France creates a crisis for the euro analogous to the sovereign debt crisis from 2010 to 2012. At that time, Portugal, Italy, Ireland, Greece and Spain were unable to keep their debt within the limits set out in the Maastricht Treaty that created the eurozone. France, by contrast is the second biggest economy in the eurozone. There are already questions over French debt sustainability; if a new government were to provoke a crisis by deliberately flouting its Maastricht requirements, the euro could face disaster.
In Italy, Giorgia Meloni’s efforts to put Italy back on the map through a series of reforms are bearing fruit. In recent months a growing proportion of the super-rich are flocking to Italy drawn by the reform agenda. The Milan stock market, a barometer for confidence in Italy, is outstripping its European rivals this year, with the Italian economy growing faster than industrial powerhouse Germany.
To achieve this turnaround, Italy has sought to appeal to the billionaire and millionaire classes by introducing a €100,000 (￡85,000) annual flat tax charged on income earned abroad.
Greece has become the first EU country to introduce a six-day working week. The regulation, which came into force on the 1st of July bucks a global trend of companies exploring whether to embrace a shorter working week. ??????????????? The pro-business government of Prime Minister Kyriakos Mitsotakis has reportedly said the measure is both “worker-friendly” and “deeply growth-orientated” whilst the labour unions have sharply criticized the move.
Others
In Canada, Prime Minister Justin Trudeau suffered a shock by-election defeat in a traditional Liberal stronghold with a big swing to Conservatives as the Canadian prime minister’s popularity crumbles under a dramatic fall in living standards. Voters in Toronto-St. Paul’s elected a Conservative candidate to the House of Commons, flipping a seat that has voted Liberal in every election since 1993.
The general election is expected next year when Justin Trudeau is seeking a fourth term as Canada's Prime Minister. Trudeau’s popularity has cratered amid high cost of living, a lack of affordable housing, falling living standards, and controversial carbon taxes that have pushed up petrol prices.
A study from May concluded that Canada was suffering one of its worst declines in living standards in 40 years and had one of the lowest economic growth rates in the G7.
In Australia, the RBA (Reserve Bank of Australia) continues to sound warnings about upside inflation risks.
The RBA left its official cash rate on hold at 4.35% at its latest policy meeting last week, but in comments to the media after the announcement, Gov. Michele Bullock stressed that upside risk surrounds the bank's inflation forecasts. Bullock added that a lot needs to go the RBA's way if it is to get inflation back into the 2% to 3% target band by the end of next year.
The next policy meeting is due on 6 August. The money markets are pricing in a 40% probability that the RBA will raise rates again at the next meeting.
In South Africa, talks between the two biggest political parties on forming a cabinet are said to have stalled after the ANC (African National Congress) withdrew an offer to appoint a member of the smaller Democratic Alliance as trade and industry minister. The disagreement is delaying a deal over the appointment of ministers almost a month after the election cost the ANC its parliamentary majority for the first time since the end of apartheid in 1992.
Saudi Arabia is set to become the world’s largest construction market as the kingdom pours vast amounts of money into projects aimed at diversifying the economy away from fossil fuels. The country’s total construction output value is forecast to reach $181.5 billion by the end of 2028, up almost 30% from 2023 levels.
Quote
Vince Lombardi, considered by many to be among the greatest coaches and leaders in American sports “The only place success comes before work is in the dictionary.”