Let’s move away from politics, of which there will be more than enough in the coming weeks, and focus on the economic legacy of the next Government.
It’s not a bad hand at all, although given the most likely election outcome, the incoming Labor team will claim it’s terrible.
The overall economic results for the rest of this year are quite clear.
Whats Next? The overall economic results for the rest of this year are quite clear
There will be two or three interest rate cuts by the Bank of England. Headline inflation will fall below 2 percent, causing real wages to rise sharply.
House prices will resume their slow rise, although don’t expect fireworks because the drop in mortgage rates will be moderate.
This is largely because the Government is still borrowing a huge amount of money, holding back long-term government bond yields.
And all the economists are busy revising upward their growth forecasts. I could see the final 2024 GDP figure being well above 1 percent, perhaps closer to 2 percent.
How will the markets respond? We’ve seen the start of a re-evaluation of FTSE 100 companies as a place to invest, but that’s actually part of a global movement in which value stocks are doing better against growth stocks, with the exception of of course from companies associated with AI.
In any case, Footsie companies make 80 per cent of their profits outside the UK, so this doesn’t say much about the domestic economy.
However, there has been a gradual rebuilding of confidence in the country’s economic management under Rishi Sunak which will continue if Keir Starmer wins a majority.
Therefore, the rerating of UK assets has yet to progress. An improvement in sterling would also be very helpful. That would keep import costs low, which would translate into lower overall inflation.
The pound is clearly undervalued, but how quickly it corrects depends on what happens to the dollar. It’s good to have a stronger pound, but we may have to wait and see what happens on the other side of the Atlantic to get it.
Everything is OK until now. But there is a huge, dark, frowning cloud hanging over the UK and, indeed, most of Europe too. The point is that we are not improving people’s living standards as quickly as in the United States.
That affects politics because if a government can’t create conditions in which each generation has a decent chance of being richer than its parents, voters will want to try someone else.
In the United States they are also in a bad mood, but consumption there is much higher than before the pandemic, while here it is not.
That is the great challenge facing the next Government. How do we help enrich people? In that famous phrase by Bill Clinton’s strategist, James Carville: ‘It’s the economy, stupid.’
This is about productivity, and our failures are largely the fault of successive governments. The problem starts at home. Public sector productivity is lower than when Tony Blair took office in 1997.
But equally important is that the next government must think about the cost of its regulatory and fiscal policies.
Why do companies choose to invest elsewhere? Is our education up to par? How do we reform a dysfunctional planning system, when we desperately need more housing? There are deep concerns about the competence of our governance. Why did the two biggest long-standing injustices of recent years (the treatment of subpostmasters and the infected blood scandal) occur in the public sector?
There are a number of questions about our financial system, many of which we have addressed in these pages.
Why don’t our pension funds invest in British shares? To what extent has our system of financial regulation encouraged private capital rather than public markets, thereby denying ordinary investors opportunities to share in the growth?
All this can be fixed. To achieve this, a calm, serene and apolitical analysis is needed.
We need to be honest with ourselves, recognize that we are doing some things well and value them, but recognize other areas where we have failed miserably and do something about them.