Blain’s Morning Porridge, 7^th May 2024: UK at Tipping Point, most important election in 50 years!

“This house can no longer keep this country hostage. It is time for voters to pronounce and replace this dysfunctional parliament…”

The UK’s general election will be the most critical moment in UK politics in decades. The key point will be for prospective new Chancellor Rachel Reeves to persuade global markets the UK is investible. She needs to be absolutely clear on her plans and engagement.

This morning’s quote was Boris in 2019… in case you were wondering…

That was an interesting weekend. The fallout from the Conservative’s dire showing in UK local elections should have the markets in full “consequences” mode. Politics matter. Politicians set taxes and spending. Their policies signal a Nations’ competency and outlook, and thus its’ overall investibility. The UK is 2.3% of global GDP – there are lots of other places to invest in global markets.

The UK is in full election mode for a vote sometime in the next 7 months – which will occur when Premier Rishi Sunak judges his moment looks best – or more properly, least bad. I have a feeling it will be the most important political moment since 1979 – the Margaret Thatcher election, the point from which much of where we are stems from.

If the electorate get it wrong, then the UK could become a footnote in the Library of Financial Mistakes’ list of economic history national endgames: 100 years after Pax Britannica, the UK could lapse into irrelevancy as a heavily indebted nation in steepening decline, crashing living standards, failing services, consumed by its inefficiencies, political sleaze, bad taxation, ineffective and weak government, internal fragmentation, identity disintegration and a lack of political awareness and trust.

Ouch – but pretty much where the last 14 years have brought us…

It’s a critical moment for the UK, but only two things really matter:

• Persuading the electorate “things can only get better”, and the nation’s multiple internal economic crises can be addressed to enable a recovery, and
• Convincing global markets it can be done – that the UK remains vibrant, robust and resilient with much to offer.

While no one outside the UK much cares if the UK makes the wrong political choices – although Brexit clearly damaged the attractiveness of the Economy – global investors, critical for the success/recovery of the economy, need to see and hear grounds for improvement. They are sceptical and need convinced.

What the markets perceive is this election comes as the UK economy approaches a “tipping point”:

• Interest rates are set to fall, but (very) slowly, a recession is still nipping (with UK yet again warned of the slowest G7 growth), while wages fail to match still rising prices.
• Brexit, trade agreements and supply chains remain a mess.
• The nation’s debt appears to be spiralling out of control as debt service costs rise.
• Inflation and falling real incomes mean a consumption crash may shortly hit, which is likely to impact home prices and deepen the mood of gloom.
• Confidence in the economy and in politicians is at an all-time low.

Meanwhile,

• The economy seems incapable of delivery; handicapped by excessive bureaucracy, over-regulation and bad planning structures.
• Privatised public infrastructure has been pillaged by private enterprise and doesn’t deliver, leaving a massive unaffordable rebuild.
• Government simply can’t maintain the massive costs of the bloated and massively inefficient (and ineffective) civil service and the burgeoning costs of their pensions – yet slashing welfare and services is top of the agenda.

Such is the record on the economy Conservative Prime Minister Rishi Sunak defends through his claim his plans are working and the UK is on the verge of recovery.

Shadow Labour Chancellor Rachel Reeves says Sunak is “gaslighting” the public with delusional promises the economy is improving.

Who do you believe? Sunak or Reeves? More, importantly… which one is the market going to listen to?

All the problems bullet-pointed above are long-term – they won’t be solved in the short-term if inflation momentarily dips below 2% (yay!), the UK briefly rises out of recession into 0.1% growth (double yay!) or the Bank of England eases rates (joy unlimited!). Yet, without any other real options, that is basically Tory strategy – hope and pray these things happen to persuade the electorate they are back on track..

Oh dear.

Let’s be absolutely fair here. There are good politicians on both sides of the UK political divide:

• The advantage for Labour is Sir Kier Starmer has cleaned up his party and got rid of the taint of Corbynism. In military terms, Starmer has the equivalent of a clear logistics chain and internal lines of communication.
• The problem for the Conservatives is few of the (once many) good Tories are left anywhere near the front-bench after the extraordinary and distracting infighting since the Brexit referendum. (Boris and Truss proved to be buffoons, but where did the seriously competent politicians like Sajid Javid go?) Premier Rishi Sunak is still fighting to establish his authority over a host of factions – external lines and broken logistics. That will not change pre-election.

I could go all political and correctly state that any government is tired after 14 years. I could add some spice and write; “never in history will a new government be faced by the legacy of such a badly executed omnishambles of bad compromises and desperately distractive policies.” Take the Rwanda plan – more time has been spent debating Rwanda in parliament than on the economy and how to balance the national debt against the spending requirements! £540 mm squandered on the Rwanda plan – we would have been better handing $1.8 mm to each asylum seeker to go build a business around.

Enough…

How will a new Labour government persuade markets they have the political competency and the ability to be more than just slightly better at managing the economy, but can actually put the UK back on track by resolving the multitude of issues now facing the economy? Reeves’ point about Sunak gaslighting the electorate is a good one – although the inflation number may fall below the Bank’s 2% target, and the UK may limp out of recession – the economic outlook will remain dire.

The timing of the next elections, and the tipping point threat, means Labour will inherit a broken economy close to its nadir. It may take them the entire period of the next parliament to recover the economy, even as the rump Tories snipe at them. The biggest risk is not that Labour win, but that they don’t get a huge majority – a narrow one will leave them as potential hostage to the left.

Tonight, Reeves will be continuing her strategy to woo the City, explaining policy and plans to the great, the good and not-so-good of the financial markets. How she comes across is critical – to build and maintain confidence Labour can demonstrate the political competency the Tories have singularly failed to demonstrate since Brexit.

Last week Reeves and London mayor Sadiq Khan laid out some of buzzwords around the plan – stability, stimulating investment, widespread reform, strong relationships with the public sector, rebuild public services, raise living standards and support jobs. The paid acknowledge how London Centric the UK economy is, but rather than dumb down London they want to raise the regional economies. All good, but tell me more….

Over the coming months.. the UK election is going to get… “interesting”.

Out of time, and off to the day job.. oh, no trains this morning…

Bill Blain

Author of The Morning Porridge

Wind Shift Capital

www.windshift.capital