Starmer's About to Inherit An Economic Boom ... Or Is He?
The Labour leader is beginning his premiership, with the best economic backdrop in years, according to Szu Ping Chan, writing in The Telegraph on Thursday. The article appeared following the release, by the Office for National Statistics (ONS), of the GDP monthly estimate, UK for May 2024. The U.K economy grew at double the pace predicted by economists in the month, in a boost for Sir Keir Starmer and Rachel Reeves. The economy expanded by 0.4pc on a month on month basis. This is the fastest pace in more than two years and double the 0.2pc expected by analysts, according to the Office for National Statistics. Better still, compared to previous year, (our favourite measure), the economy grew by 1.4%. The strong performance prompted economists at Goldman Sachs to upgrade their own growth forecasts. James Moberly, economist at Goldman, said: "We raise our annual GDP growth forecast for 2024 to 1.2pc. This is above consensus of 0.7pc and the Bank's forecast of 0.4pc." Barclays and Deutsche Bank also raised forecasts to 1.1% and 1.2% for growth this year, following the latest data. At The Saturday Economist, we are flagging a change in our expectations for the year. Assuming no growth month on month for the rest of the year, growth in 2024 will be around 1.2%, (last year's performance was so bad). We await a further month's data for June and the second quarter of 2024 to confirm the call. Forecasts for the year could be revised even higher if the growth spurt continues. Grant Fitzner, the ONS's chief economist, described the expansion as "buoyant", (but not gangbusters) adding other indicators of the economy suggested the recovery was gaining traction. Britain's services sector was the largest contributor to growth, with the sector expanding by 1.6 per cent year on year. Transport and distribution was up by over 7 per cent, professional services sector was up by over 4 per cent. Liz McKeown, director of economic statistics at the ONS, said: "Construction grew at its fastest rate in almost a year after recent weakness, with house building and infrastructure projects boosting the industry." Growth in professional services was also a bright spot for the economy both in May and since the start of the year. The ONS said May's growth was driven by a rise in "scientific research and development" as well as technical testing and analysis linked to the engineering sector." Mr Fitzner said: "It continues a reasonably buoyant trend that we've seen through the first half of this year. Some of that is a bounce back from the downturn from last year, but this is continuing into the second quarter." The Pound rallied closing at just under $1.30 on Friday. Markets appear confused by mixed messages from the Federal Reserve and the Bank of England for that matter. The TSE chart suggests this is an over extension in the short term, some short positions should be restored at the start of next week. We expect the Sterling rally to fade somewhat. Ten year gilt yields moved down slightly closing at 4.11 from 4.12. Two year gilts closed off five basis points in the week. It may not be a boom, but higher growth will ensure additional monies into the Rachel Reeves coffers, allaying fears of tax hikes, perhaps ...
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It's a Labour Landslide ... with just 34% of the vote ...
John Authers, senior editor for markets at Bloomberg summed it up, "I wouldn't vote for Labour, one of my favorite contacts in the City told me this week, but they aren't going to mess things up." This is the attitude permeating the UK's financial community. The mood for months has been the Conservatives deserved to lose power. It doesn't matter much, if Labour do win. They could hardly do much worse than the Tories Now the voters have spoken, taking the same attitude as the City perhaps. Casting ballots tactically, against the Tories. Labour's share of the vote didn't rise much but ... In the final count, Labour gained 211 seats, leading with 412 seats overall. The Conservatives lost 250 seats, entering the House next week, with just 120 seats. Lib Dems the big gainers with 63 new MPs and 71 seats in the lower chamber. Reform the big no show with just five seats at close of play. It must have been Ed Davey's bungee jumping which tipped the poll for the Lib Dems. Perhaps Nigel Farage, should have been at the end of a bungee rope. Many would have voted for that. In terms of share of votes, Labour scored 34%, Tories 24%, Reform 14% and the Lib Dems 12%. Interesting to note the combined Tory-Reform share was 38%, a four point lead over Labour. Lib Dems lower share of the vote, yielding many more seats that Reform. No wonder Reform advocate a first past the pub system. For the Tories, it was the end of an era. Many big names lost in the battle. Liz Truss, Jacob Rees-Mogg, Penny Mordaunt, Grant Shapps (Defence Secretary), Gillian Keegan, (Education Secretary) and Lucy Frazer (Culture Secretary. Jeremy Hunt clung on to his Surrey seat. The ex Chancellor, MP for South West Surrey since 2005, won the newly created seat of Godalming and Ash by around 1,000 votes after stiff competition from the Liberal Democrat candidate. Will he be the next leader of the Tory Party? Rishi Sunak has announced he will step down, once formal arrangements are in place to elect his successor. Sunak held 48% of the vote in the constituency of Richmond and Northallerton in Northern England. A staunch Tory seat, "they would elect a goat, if it had a blue rosette around its neck", it is said. For the Tories and the electorate, it has all been too much. Since 2016 there have been five prime ministers, seven chancellors, seven foreign secretaries, seven home secretaries, eight industry ministers and nine education secretaries. In 2022 alone, the country experienced three prime ministers, four chancellors of the exchequer, three home secretaries, three health secretaries, three industry ministers and five education secretaries. Since the implosion of the gilts market in 2022, it has been taken as inevitable the Conservatives would lose out in the election. The terrifying episode of rising rates, would ensure Labour would not attempt a big expansion of tax and spending plans in a dash for growth. Labour will take over, accepting the bond market won't let them do anything too expansionary or ambitious. Whatever Labour does next, it will be within the parameters set by the gilts market. That's why the City is so relaxed. So How Did The Markets React ? UK stock markets moved higher following news of Labour's election victory. House builders the biggest winners. Traders bet the new government's proposals to free up the planning system would allow developers to build more homes. Excitement curtailed, the FTSE closed at just under 8,200, down from the peak of 8,269 intra day. Ten year gilt yields closed at 4.13% drifting slightly over the day. Sterling closed up against the Dollar at $1.28 and up against the Euro at 1.08. The limited reaction in currency and bond markets reflected the fact the election result has been a foregone conclusion for a long time now. Starmer and Reeves have made it pretty clear they would play safe for now. The new Prime Minister stated in his speech. "Our work is urgent .. We begin it today". A lot to be done, we wish them well ... But The Bond Vigilantes Are Watching ... |
The Saturday EconomistAuthorJohn Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy. Archives
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