After 15 years of Conservative Party governments, the Labour Party looks likely to win the next UK general election. It aims to bring a pro-business and pro-EU approach to Downing Street. At the same time, falling inflation and wage growth will allow the Bank of England (BoE) to start cutting interest rates later in 2024. In this Infocus, Economist Joaquin Thul explains the reasons behind the improved outlook for the UK economy.
The Labour Party looks likely to win the next UK general election. The latest polls show a 20 percentage point lead in favour of Labour for an election which is still to be called, but must be held no later than 28 January 2025. A change in the political backdrop, an improved macroeconomic outlook and attractive valuations support an upgrade in our views of the UK market.
The effects of the global pandemic, the aftermath of the Brexit deal, and negative shocks from the Russia-Ukraine war on energy prices led to an underperformance of the UK economy. GDP growth slowed from 1.6% year-on-year (YoY) in 2019 to 0.1% YoY in 2023. Annual inflation peaked at 11% in November 2022 after a series of shocks, while the fiscal deficit widened from 2.5% of GDP in 2019 to 6% of GDP in 2023. Gross public debt also increased from 85% of GDP to 101% of GDP over the same period. Although some of the deterioration in the macroeconomic data was due to global factors, the mismanagement from Conservative governments explains a large part of the gap in the polls in favour of Labour.
Since the election of Sir Keir Starmer as party leader in 2020, Labour has adopted a pro-business economic plan, aiming to boost productivity and attract investment. Although taxes are expected to rise for wealthier individuals, the emphasis will be placed on reducing tax avoidance and toughening the rules for taxing non-domiciled residents in the UK.
Former BoE Economist and Shadow Chancellor of the Exchequer Rachel Reeves has affirmed the need for the UK to maintain a pro-business agenda, committing to providing a roadmap for business taxation and ruling out raising the corporate tax rate above 25%. With a fiscal deficit of 6% of GDP and gross debt above 100% of GDP, Labour will need the private sector to boost investment, increase productivity and support growth.
In addition, Labour intends to rebuild the UK’s rapport with the EU. Although there are no plans to re-join the customs union, a closer relationship between the UK and EU will undoubtedly be beneficial for both economies. According to estimates from the National Institute of Economic and Social Research, the negative impact of Brexit is expected to be the most pronounced on businesses’ reduced willingness to invest in the UK. Therefore, improved relations between the UK and EU should boost the prospects for investment and reduce the negative impact of Brexit on consumption, income, and overall labour productivity.
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