With Labour and Conservatives neck and neck in the polls, it seems likely that the UK will be headed for another coalition government very soon. The big question for the markets, is….
“What will this coalition government look like and what will be its impact on the UK economy?”
A Labour-SNP Outcome
On May the 7th the most probable outcome will be a Labour-SNP coalition. This result is likely to take the format of a Labour minority government, supported by SNP votes; rather than a formal coalition.
Many in the media have concerns of such a left wing government. However; from a market centric point of view, this effect is likely to be limited. One concern is that utility companies may suffer, because they may have to undergo a 2 year price freeze. Beyond this, the economy may perform better for the next 5 years, simply because the SNP in particular are in favour of halting the austerity program and increasing government spending by 0.5% above inflation. If the private economy continues to expand at its present rate, this could lead to a substantial economic boost to the UK, over the next few years.
The long term consideration for the government is that, will it expand the economy quickly enough, so as to contain the UK’s deficit and mounting debt problems.
A Conservatives/ UKIP/Lib Dem and Ulster Unionist Outcome
With UKIP likely to get 2 MP’s and the Lib Dems 8, the only possible outcome would be Conservative led coalition, with the Ulster Unionists. Given the recent collapse in support for the Lib Dems and the fact that they have supported the current government; one would ask if the Lib Dems are prepared to support another conservative led government.
The big economic question is:
“Will the Conservatives, plan for a 2017 referendum on the UK’s position in Europe?”
Many companies have already threatened to move their HQ’s out of the UK and the vast majority of workers who were polled in the city, are also against a move. Currently public support to leave the EU is around 50.50. Two years of uncertainty running up to a referendum would undoubtedly hurt the UK economy.
In addition to the referendum, the other Conservative policy, which is likely to hurt the economy, would be Osborne’s plans for greater austerity. Contracting government spending by 5% of GDP, over the next 5 years, will certainly reduce the UK’s economic growth. It will also have a deflationary effect which may not be desirable given that the UK’s inflation is currently zero.
From an investment point of view; a Labour/SNP coalition, is likely to be better for the equity markets and a Conservative Government, is likely to be better for the bond market, this is due to fiscal contraction and effectively reduced inflation. However, all bets would be off, if the Conservatives announce a referendum on EU membership. If this is the case then it is probably best to avoid all sterling based assets for some time.
I hope that you have enjoyed reading this post.
Kuala Lumpur : Malaysia