Become a Creator today!Start creating today - Share your story with the world!
Start for free
00:00:00
00:00:01
The Macro Brief – The UK gears up for an election
25 Plays1 year ago
With a general election now set for 4 July, Simon Wells, Chief European Economist, assesses the key challenges facing the incoming government. Disclaimer: https://www.research.hsbc.com/R/101/zmgJvbL. Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/ or click here: https://www.gbm.hsbc.com/insights/global-research.
Hosted on Acast. See acast.com/privacy for more information.
Recommended
Transcript
Introduction to HSBC Global Viewpoint Podcast
00:00:02
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes.
00:00:16
Speaker
Thanks for listening.
00:00:17
Speaker
And now onto today's show.
00:00:24
Speaker
This podcast was recorded for publication on the 23rd of May, 2024 by HSBC Global Research.
00:00:29
Speaker
All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
00:00:34
Speaker
And don't forget that you can follow this weekly podcast on Apple and Spotify, or wherever you get your podcasts.
00:00:38
Speaker
Just search for The Macro Brief.
UK Political Climate and Upcoming Election
00:00:43
Speaker
Hello and welcome to the Macrobrief.
00:00:44
Speaker
I'm your host, Piers Butler.
00:00:46
Speaker
After months of speculation, UK Prime Minister Rishi Sunak has called a general election for the 4th of July.
00:00:53
Speaker
Now, the opposition Labour Party might be well ahead in the opinion polls, but the Prime Minister will be hoping that more positive recent news on inflation and the growth outlook could still give him a path to victory.
00:01:04
Speaker
So, with it all to play for, let's dig into the details with Simon Wells, our Chief European Economist.
00:01:10
Speaker
Simon, welcome.
00:01:10
Speaker
Hi.
00:01:11
Speaker
Quite a surprise, really.
00:01:12
Speaker
Do you think that the very latest economic data, I know we've had some positive economic data, but the very latest economic data on inflation wasn't so positive.
00:01:20
Speaker
Do you think that played a role?
00:01:22
Speaker
I think it may well have done.
00:01:23
Speaker
You say it wasn't so positive, but of course headline inflation still fell from 3.2% to 2.3%, allowing the government to claim that they are winning the battle against inflation.
00:01:37
Speaker
And it's a big fall.
00:01:39
Speaker
On the other hand, and what you're alluding to, is it didn't fall as far as the market had expected.
00:01:44
Speaker
And in particular, the key indicator the Bank of England's looking at, which is service sector inflation, really only ticked down from 6% to 5.9%.
00:01:54
Speaker
So it still remains pretty high.
00:01:57
Speaker
The result of that is the market, and indeed us, have pushed out expectations of Bank of England rate cuts.
00:02:05
Speaker
So whereas previously, if we had an autumn election, perhaps the prime minister could have pointed to all these things and falling interest rates, the latter is maybe looking a little dicier now.
Labour Majority and Policy Implications
00:02:17
Speaker
So while people are seeing the economy coming back to growth and inflation falling, maybe he thinks this is the sweet spot.
00:02:24
Speaker
So coming back to the polls and indeed the betting markets, they're all predicting a Labour victory, but the size of a potential majority matters.
00:02:31
Speaker
Why is that?
00:02:32
Speaker
Well, as you say, there's still a lot of uncertainties.
00:02:34
Speaker
It matters because, well, you can argue it both ways.
00:02:37
Speaker
If the Labour Party has a large 97-style Blair majority, then it can get on with doing more bold and radical things without fear of not being able to get them through Parliament.
00:02:51
Speaker
On the other hand, you might say that a smaller majority might rein in what their ability to do, and some people might see that as a good thing.
00:03:01
Speaker
On the other hand, a small majority may also allow a small number of Labour MPs really to hold its own government to ransom.
00:03:09
Speaker
And that could be a bit more problematic for the country and the economy, a bit more like what we saw, of course, under the Conservatives, under Theresa May.
00:03:17
Speaker
Are people underestimating the sheer scale of the swing that is required to achieve a significant majority?
00:03:22
Speaker
Possibly, but as you say, the opinion polls are what they are, and they say what would happen were there to be an election tomorrow.
00:03:29
Speaker
Now, things can change.
00:03:31
Speaker
But certainly, it is extremely unusual to overturn the size of a majority that Boris Johnson won back in 2019 in a single term, yet that is what the polls are indicating.
00:03:45
Speaker
When the Conservatives took power in 2010, the chief secretary to the Treasury left a note saying, I'm afraid there is no money.
UK Fiscal Challenges and Debt Concerns
00:03:54
Speaker
But as it turns out, there was more money.
00:03:56
Speaker
I mean, essentially funded by higher borrowing, borrowing went up.
00:04:00
Speaker
So could that not just continue?
00:04:02
Speaker
After all, when you look at the forecasts, there appears to be $9 billion of headroom against fiscal targets.
00:04:08
Speaker
Yes.
00:04:08
Speaker
Well, first of all, I think the person who left that note has subsequently said they regret it.
00:04:14
Speaker
But we were looking then at a debt to GDP ratio in the UK of about 66%.
00:04:20
Speaker
Now it's a touch under 100%.
00:04:24
Speaker
Back then, of course, interest rates were basically zero and the Bank of England was buying bonds.
00:04:30
Speaker
Now interest rates are back up substantially.
00:04:33
Speaker
Bank of England is selling bonds.
00:04:36
Speaker
So maybe, who knows, perhaps debt to GDP could rise and rise further.
00:04:42
Speaker
But the backdrop to servicing that debt has certainly deteriorated a lot since 2010.
00:04:49
Speaker
And what about coming back to this nine billion of headroom against fiscal targets?
00:04:54
Speaker
You argue in your report that there are fiscal fallacies associated with that.
00:04:58
Speaker
Can you tell us about those?
00:05:00
Speaker
Well, that's right.
00:05:01
Speaker
One of the charts in the report shows that Jeremy Hunt is meeting his own fiscal targets by the narrowest of margins relative to.
00:05:10
Speaker
to his predecessors.
00:05:12
Speaker
And even to get to that narrow amount of fiscal headroom, you are already looking at unspecified real terms cuts in public expenditure over the coming years.
00:05:23
Speaker
And of course, one thing whichever incoming government has to do will be to have a spending review to work out
00:05:29
Speaker
how that overall shrinking envelope is allocated, which will be very, very difficult.
00:05:35
Speaker
And of course, that is one of the flaws with the UK system is the fiscal watchdog, the Office for Budget Responsibility, has to take the government at their word.
00:05:44
Speaker
So if they say we're going to drastically cut spending in the future, they put that into their forecast, however likely or unlikely you or I might think it would be actually to happen.
00:05:54
Speaker
So the outlook is obviously for a very constrained fiscal position for the new government.
00:06:00
Speaker
And that leads us to potential other sources of funding, namely taxes.
00:06:05
Speaker
Both parties have not advocated significant tax rises.
00:06:09
Speaker
But as you say in your report, if history is any guide, that may not mean very much.
00:06:14
Speaker
Well, yes, that's right.
00:06:15
Speaker
One of the charts in the report, which will surprise nobody, shows that ahead of general elections, governments tend to cut taxes and after them, they tend to raise taxes.
00:06:27
Speaker
And against the fiscal backdrop that I've just described...
00:06:31
Speaker
I would wager that probably we will see a degree of tax rises after this election.
00:06:37
Speaker
Now, the question is where they're going to fall because the main parties have pretty much ruled out for now raising the big revenue earners.
00:06:45
Speaker
That's income tax, national insurance, or VAT.
00:06:49
Speaker
Corporation tax could be something that they may want to raise.
00:06:54
Speaker
But so far, Labour have only really talked about
00:06:56
Speaker
minor tax rises, things that are only going to raise seven to eight billion, and that ain't a lot.
00:07:02
Speaker
When you look at the sort of European scene, does the UK stand out in terms of its tax position, its tax take?
00:07:08
Speaker
Well, compared to a country like France, of course, the overall tax take of GDP is still low.
00:07:15
Speaker
But for the UK, it is rising to levels that we haven't seen since the end of the Second World War.
00:07:20
Speaker
So it depends which way you look at it.
00:07:23
Speaker
I think on corporation tax relative to many other European countries, the rates still look relatively low.
00:07:30
Speaker
And so that is an area that potentially a new Labour government might want to look at.
00:07:35
Speaker
And you talk about stealth tax as well.
00:07:38
Speaker
How does that sort of come through?
00:07:39
Speaker
Well, stealth tax is interesting, particularly recently in terms of what we call the fiscal drag from inflation.
00:07:47
Speaker
So the existing government has cut taxes twice.
00:07:51
Speaker
In autumn of last year, it took two pence off national insurance, which is a form of UK income tax.
00:07:56
Speaker
It did again another two pence in March of this year.
00:08:01
Speaker
Now, over the forecast horizon, that's sort of like a 20 billion pound tax giveaway.
00:08:07
Speaker
Why didn't this affect the opinion polls?
00:08:09
Speaker
Why does no one seem to be jumping up and down for joy?
00:08:13
Speaker
Because inflation, given frozen thresholds, has dragged more people into higher tax brackets, more people into paying tax full stop.
00:08:21
Speaker
The effect of that is 40 billion net tax rise.
00:08:25
Speaker
So really, the tax man has taken 40, given back 20.
00:08:29
Speaker
Net net, of course, that's the tax rise.
Potential Labour Government Policies
00:08:32
Speaker
Given those fiscal constraints and perhaps the lack of any significant tax increases, is it just going to be more of the same with the new Labour government?
00:08:41
Speaker
I suspect if we think back to what happened to Liz Truss and Kwasi Kwarteng,
00:08:47
Speaker
the new administration will be very careful not to be too fiscally lax, at least in the near term.
00:08:54
Speaker
Be very scared of a repeat of what happened in late 2022.
00:08:59
Speaker
Does that mean it'll be more of the same whatever happens?
00:09:03
Speaker
Well, even if the overall fiscal stance doesn't change that much, there are ideological differences.
00:09:08
Speaker
And that's what I think we need to focus on.
00:09:12
Speaker
Labour rights will be a big issue.
00:09:15
Speaker
If there's going to be any immediate surprises from a Labour government, it could be on things like modifying zero-hours contracts or fire and rehire a company's ability to do that.
00:09:28
Speaker
Certainly, Labour protection is one area to look at.
00:09:30
Speaker
But there are others.
00:09:31
Speaker
The Labour government has promised full renationalisation of the railways.
00:09:36
Speaker
It said it will bulldoze planning regulation, although of course most governments say they're going to do that, but in my career at least they've all had fairly limited success.
00:09:46
Speaker
And what about Europe?
00:09:47
Speaker
That doesn't seem to be really part of the debate at the moment.
00:09:50
Speaker
Well, I think there's a reason for that, which is polling shows voters are sick of Brexit.
00:09:54
Speaker
They don't want to hear about it.
00:09:57
Speaker
That doesn't mean it's not affecting the economy, of course.
00:09:59
Speaker
And Labour have talked maybe about a twin track approach.
00:10:02
Speaker
So one track might be more alignment on defence spending, more cooperation there.
00:10:08
Speaker
Another track might be to do something to boost goods trade, more alignment of agri-food regulations, that sort of thing.
00:10:16
Speaker
So I think we can potentially look forward probably to a closer relationship again between the UK and the EU under the new government.
00:10:26
Speaker
But certainly no one's going to be standing up saying the UK needs to rejoin in this election.
00:10:32
Speaker
So we talked a lot about Labour policies.
00:10:34
Speaker
Is anything on the Conservative side that they could be looking to announce?
00:10:37
Speaker
Is there any more fiscal giveaways that they could do before the election?
00:10:41
Speaker
Well, I think now that we've got the election on the 4th of July, the chance of another fiscal event, which we might have been expecting, has now gone.
00:10:50
Speaker
So, nope, I think we are where we are.
00:10:53
Speaker
Simon, I'm sure we'll have you back in the countdown towards the big day on the 4th of July.
00:10:56
Speaker
But for now, thank you very much for joining us.
00:10:58
Speaker
Thank you.
Global Economic Outlook: Focus on China and Europe
00:11:03
Speaker
Ever wonder what it would cost to buy up all the unsold property in China?
00:11:06
Speaker
With enough space to cover the New York borough of Manhattan five times over, there's quite a lot of unsold property.
00:11:12
Speaker
Tune into this week's Under the Banyan Tree podcast with me, Fred Newman, for the answer, or at least close to an educated guess as we can get.
00:11:21
Speaker
I've got two great guests joining me this week, Chief China Economist Jing Liu and Head of Asia Property Research Michelle Kwok.
00:11:27
Speaker
We'll be talking all things China property, so make sure you join us Under the Banyan Tree.
00:11:35
Speaker
Here are some other highlights from the team at Global Research this week.
00:11:39
Speaker
Fabio Balboni, senior European economist, has been reviewing the fiscal position of countries across the region.
00:11:45
Speaker
He says that the structural fiscal deterioration in many countries since the pandemic and the return of EU fiscal rules mean that some, notably France and Italy, could face tough consolidation challenges from next year.
Market Recovery and Risks
00:11:57
Speaker
There are some signs that trade is returning to growth.
00:12:00
Speaker
New orders are expanding, retail inventories are coming into balance, and supply chain pressures are low.
00:12:06
Speaker
However, trade economist Janela Narajanagam warns us not to get too excited.
00:12:11
Speaker
High freight costs, port congestion, Red Sea shipping disruption, and rising protectionism all pose risks.
00:12:19
Speaker
And crucially, we need a sustained recovery in consumer demand to see a meaningful rebound in world trade.
00:12:25
Speaker
And finally, Max Kettner, chief multi-asset strategist, says there are two explanations why risk assets have more than recouped April's losses.
00:12:34
Speaker
Firstly, growth continues to be on a firm footing.
00:12:37
Speaker
And secondly, hawkish rate expectations have reversed somewhat.
00:12:41
Speaker
And in his latest strategy note, Max outlines the reasons why he thinks this rally in risk assets can continue.
Podcast Engagement and Queries
00:12:48
Speaker
If you'd like more information on anything we've talked about today, then please email askresearch at hsbc.com.
00:12:57
Speaker
So that's a wrap.
00:12:58
Speaker
Thanks very much for listening to The Macrobrief.
00:13:00
Speaker
We'll be back again next week.
00:13:26
Speaker
Thank you for joining us at HSBC Global Viewpoint.
00:13:30
Speaker
We hope you enjoyed the discussion.
00:13:32
Speaker
Make sure you're subscribed to stay up to date with new episodes.