There is talk of a post-election pickup, there is talk that the economy is on the road to recovery, is that right?
Will the election mark a turning point?
I made the worst investing decision of my life thanks to fears over a Labour win in a general election. It was back in 1997, and I had been fortunate enough to have enjoyed a big capital gain. All the advice I received was to invest the money before the election because in the event of a Labour win, I would immediately lose all the tax benefits of certain investments. You may recall, ISAs were called PEPs back then. Well, I followed the advice, rushed my investment decisions and because of that made investments I wouldn’t have done normally. Labour won the election, and the difference it made was diddly squat.
That’s why I get cynical about the warnings I keep reading of what might happen if Labour win. In the incredibly unlikely event of a Labour win in the 2019 election — and frankly, I think I am more likely to get hit by lightning — the fear mongering will probably prove to be overdone. For one thing, the markets, in particular the movements of the pound and bond yields, probably won’t let Labour implement its full policies — just as happened when Mitterrand was elected French President all those years ago. For another thing, because Labour plans (as far as the markets will let them go) will entail a massive fiscal stimulus, this will support the economy and may go some way towards mitigating against the negative (from a certain point of view) side of their policies.
Right now, however, the narrative that a Labour win will destroy the economy is so strong, that the markets are acting in a kind of anticipated relief — so convinced are they of a Tory victory.
Well, I write these words 48 hours before we will know the result, maybe you will read this sometime into my future aware of the result. Right now, the maxim, ‘the markets hate uncertainty’, is in full force — and it is in full force for two reasons: number one, they are certain of a Tory victory, number two, a Tory victory will deliver certainty over Brexit.
Of course, the notion that the Tories will create Brexit certainty is nonsense, if the UK were to leave the EU in January; we would then see a 12-month transition period. This is unlikely to lead to a decent trade deal. Either the transition period will end with a poor deal, or there is no deal.
The markets, however, have bought into the idea that Boris = certainty, just as people bought into the idea that Boris miraculously negotiated a last minute deal with the EU, when in fact anyone can renegotiate a deal super-quick if the deal offers the third party more concessions.
But spin counts, and the markets have bought spin.
And everywhere I look, I see a narrative that we are set for a pickup?
The pound has risen to a seven month high against the dollar and a two and a half year high against the euro, on this sense of optimism. According to the latest Halifax index, house prices increased by a one per cent in November alone, pushing the annual rate up to 2.1 per cent.
It does indeed seem that the much predicted 2019 recession looks more like a mid-cycle slowdown. But look deeper and a reason emerges.
The latest purchasing manager’s indexes were awful again and pointed to contraction in the UK economy so far in Q4. They were slightly worse than the purchasing manager’s indexes for the Eurozone — as they have been, for most of this year — which point to modest growth.
But there is one big difference between the UK economy and the Eurozone and this difference is not picked up by the purchasing managers indexes — and that is government spending.
The UK government, just like the Trump administration, has given up on any pretence of trying to balance the books. Now I am not arguing against this, but the point is that the reason why the UK has not suffered a recession, as the purchasing managers indexes predicted, is because of government spending.
Meanwhile, in Germany, perhaps the one major economy in the world where a fiscal stimulus would raise no serious questions about affordability, still posts a budget surplus, sees government debt to GDP at half the UK ratio, while the government can borrow over ten years at negative interest rates.
The deeper, underlying problem of excessive global savings and imbalances is still present.
Will the UK recover next year? Johnson is trying to do a Trump and get animal spirits fired up. This may even work. If the markets hate uncertainty and love certainty, maybe they will settle for someone telling them things are certain instead.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees