This is the right stage of the economic cycle for a new government to be taking office. The UK has seen the policymaker’s dream of accelerating growth and falling inflation over the last 18 months, and the long squeeze on consumers has drawn to an end. Our latest Consumer Tracker found that levels of confidence about household incomes is at a three-year high. The cost of borrowing, meanwhile, is very low. On average, economists see the UK growing by 2.5 per cent this year and next, a decent rate of growth which is towards the top of the European growth league.
Risks are still there in the global economy. US activity data have been on the weak side of expectations since the start of the year. Three months on from the election that swept Syriza to power, Greece’s future in the euro area remains uncertain. At home, UK growth came in disappointingly weak in the first quarter, prompting concerns that the UK recovery is running out of steam. But, on balance, the UK recovery has pretty good momentum.
In reality, quarterly GDP data are choppy and prone to revision, and it is likely that the first quarter UK slowdown was an aberration rather than cause for concern. Similarly, softer data from the US seem to suggest that America is in one of those periodic weak patches. The outlook for growth in the euro area has improved since the start of the year, in spite of the rumbling Greek crisis. Financial markets, perhaps optimistically, seem to think a Greek exit from the euro area would not trigger a break-up of the whole system.
Today, most of the worries lie closer to home.
Concerns about the General Election seem to be behind the decline in corporate risk appetite and rising perceptions of uncertainty seen in the latest Deloitte survey of chief financial officers (CFOs). CFOs worry about the risks of higher taxes, more regulation and potential withdrawal from the EU; food for thought for those of all political stripes.
While the UK recovery is pretty solid, that isn’t to say it could not be derailed. In the longer term, the UK still faces the challenge of poor productivity and high levels of government borrowing.
The experience of the last coalition sheds light on how the next government could start to tackle these challenges.
Before the 2010 General Election, the scale of UK public borrowing was a major concern for markets and for business. We tend to forget, but the worry then was that high levels of borrowing could push the economy into a new financial crisis. In our pre-election CFO Survey in April 2010, 85 per cent of chief financial officers said deficit reduction should be the new government’s top economic priority.
On taking office, the coalition put deficit reduction at the heart of its strategy. Markets duly reacted. Talk of the UK’s credit rating being downgraded subsided and the price of UK government bonds soared.
The paradox is that the coalition missed its deficit reduction target. The UK deficit, though halved from the levels of five years ago, is still one of the largest in the industrialised world.
The lesson is: in economics, intent matters. Fears about the UK deficit were assuaged by a belief that the coalition was committed to debt reduction. The euro crisis and a disappointing trend in tax receipts contributed to the failure to meet the deficit target. But markets have remained fairly sanguine, in part because they think the government is serious about deficit reduction.
So what’s the message for the political parties as the wheeling and dealing begins?
The recovery, and the role of business in delivering it, should not be taken for granted. CFOs’ expectations for investment are already flagging. Given that growth is dependent on the private sector, policymakers need to be acutely sensitive to the impact their policies might have on business confidence. Business is nervous about political uncertainty and business-hostile policy change. A strong signal from our new government of its commitment to pro-growth policies and a stable and predictable business environment would provide the reassurance that business craves.
Visit our General Election poll tracker to see how the polls changed in the build-up to election day.