As expected, the new centre-left government replaces the Conservatives after 14 years in office.
5 July 2024
Labour have won a significant landslide victory over the Conservatives in the UK general election. The FTSE 250 index of more domestically orientated stocks was already posting strong gains by mid-morning the day after the vote, and the pound was a touch firmer against the US dollar at USD 1.28. But for the incoming government, the economic challenges are significant. It is true that the economy itself is now slowly healing, with inflation now down to the 2% level year-on-year, potentially giving the Bank of England scope to start cutting interest rates soon.
But the primary challenge will be around growth and productivity, both of which have been lacklustre since the Global Financial Crisis of 2007-08. According to the latest Bloomberg survey of economists, UK growth is set to be just 0.7% for 2024, in stark contrast to 2.3% expected in the US and even France, where 0.9% of growth is forecast. Sir Keir Starmer repeatedly emphasised the "No. 1 priority" of growth during the election campaign but remains constrained in how this might realistically be brought about. Any talk of re-entry to the EU, even the customs union, is firmly off the cards so as not to have risked votes during the campaign. This leaves Britain, for now, on its own in a world increasingly turning to protectionism.
Further, significant fiscal expansion seems unlikely given how the 2022 Truss government was effectively brought down by an uncooperative gilt market. Inward investment is the remaining potential driver and not an unrealistic prospect given how unsettling the last few years of chaotic Conservative rule have been for business. But higher taxes on 'the rich', in areas such as pensions, school fees, non-doms, among others, will raise questions around how deep Labour's commitment to business really is. In the meantime, markets can and are taking the win on the prospect of some long-overdue stability.
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The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is not an indicator for the current or future development.