Political risk will remain in focus in 2024 with important elections in 40 countries, making up 40% of the world population and 40% of world GDP.
Some of these will be market moving. A victory for the pro-independence Democratic Progressive Party in this weekend’s Taiwanese elections could lead to an increase in tensions with China. The possibility of a second Trump presidency will keep the outlook for US policy uncertain. At home in the UK, all eyes will be on a likely general election in the second half of the year but the macro policies on offer from the two main parties are surprisingly similar.
The UK is beset with problems. The economy has flatlined since 2019 in real terms while the price level has risen by more than a fifth. Strike action seems never ending, interest rates are high and the fiscal outlook is dire. The last incumbent to fight an election against such a poor backdrop was Gordon Brown in 2010 – and yet it’s hard to see how the election outcome will make a lot of difference in macro policy terms. Both parties have learned the lesson of the 2022 “mini-budget” and are pledging to stick to fiscal rules, neither is proposing to change the trading relationship with the EU in a meaningful way and neither is likely to spell out what this means for public spending.
There is scope for a different approach. Renewed membership of the Single Market would keep Britain outside the EU while reversing some of the 4% hit to medium-term economic forecasts that the Office for Budget Responsibility has factored in for Brexit. Such an approach would allow greater government spending and/or lower taxes than would otherwise be the case. Public opinion remains divided, but surveys suggest a majority would be happy to see a softer Brexit and even, ultimately, a return to full EU membership.
Those expecting a change in government in 2024 to deliver such an outcome are likely to be disappointed. Sensing a mood for change, Labour is focusing a risk averse campaign simply on being the other horse in a two-horse race. They are minimising macro policy differences to limit lines of attack. The manifesto may explicitly rule out Single Market membership, focusing instead on largely cosmetic tweaks to the likes of veterinary checks and musician visas.
This could prove costly. Whoever wins the election will have to face the reality of higher debt service costs and departmental spending plans that haven’t been increased for inflation. Gilt investors may well be sceptical that the UK will be able to follow through on a new round of austerity, though the direction of yields will probably depend more on where inflation lands than the level of government debt. Investors may also take some comfort that there is a clear and achievable policy that can boost UK growth and improve debt sustainability as and when the political mood is right. Few countries can credibly claim such a thing.
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