ClockWise: UK General Election unlikely to surprise markets

2024 is delivering on its promise to be a big year in global politics with Rishi Sunak calling a UK General Election for 4 July, in a slightly surreal Downing Street announcement in the pouring rain against the distant strains of D:Ream’s 1997 anthem ‘Things Can Only Get Better’.

In some ways things are getting better in the UK. We’ve just seen both the best quarter on quarter GDP and the lowest year on year inflation in almost three years. Context is everything, though. In real terms, GDP is still only 1.5% above its pre-pandemic, pre-Brexit level (see chart). Meanwhile, the price level for consumer goods is a whopping 23% higher. And while investors were at one point expecting at least six rate cuts from the Bank of England this year, inflation has been slow to fall and they now put only a 1 in 10 chance on a first rate cut in June.

Against this backdrop, and absent major surprises, we don’t expect the UK election to be a market moving event. The opinion polls are strongly skewed towards a victory for Keir Starmer’s Labour. Moreover, macro-economic policy differences are far smaller than they were in 2019 when Boris Johnson squared up against Jeremy Corbyn. This time both parties are pledging to stick to fiscal rules and to stay outside the EU Single Market. Either party would inherit severely strained public finances, limiting their room for manoeuvre.

November’s election in the US is a different matter altogether. The polls are close enough for either Biden or Trump to win the Presidency and there are major geopolitical forces hanging on the outcome – not least the war in Ukraine and the degree to which China feels emboldened to act against Taiwan, after their January 2024 election saw victory for the pro-independence party.

UK real GDP, CPI and Base Rates

Source: LSEG Datastream as at 16/02/2024

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