UK Prime Minister (PM) Rishi Sunak surprised everyone on 22 May. Speaking outside 10 Downing Street, the PM called for a snap general election on 4 July.
Parliament was subsequently dissolved on 30 May, with all business in the House of Commons and House of Lords ending.
Why Did Sunak Call for an Early Election?
Contrary to expectations of an autumn election, which might have given the Conservative Party a better chance of closing the gap with Labour, Sunak called the election on the day that official estimates showed Consumer Price Index (CPI) inflation eased to +2.3% in the twelve months to April, from +3.2% in March. Many concluded that calling a snap election was the optimal time to do so from an economic perspective. In his announcement, Sunak added that the drop in inflation, alongside the UK’s exit from (technical) recession, proved his plan and priorities were working. This also signalled that the subsequent Tory campaign would be framed around the discourse of economic recovery, however minimal it has been in reality.
Some analysts argue the PM may have also called for an early election to secure the vote of centre-right Conservatives by halting the right-wing Reform UK party’s rise, leaving no time for the latter to organise a campaign and find candidates. Although one poll published on June 13 indicated that Reform UK was ahead of the Conservatives, most polls still put the Tories ahead of Nigel Farage’s Reform Party. In addition, given the UK’s First Past the Post System, the Tories are expected to do much better than Reform regarding seats as the former’s vote share is better concentrated.
The Labour Party, poised for a win after 14 years in opposition, welcomed the call for an early election, with its leader Sir Keir Starmer stating, ‘it was time for change’ and that the ‘Tory chaos’ has damaged the economy. He also criticised the Conservatives’ management of the public services, the NHS, and tackling crime.
What Is the First Past the Post System?
The First Past the Post System system is used to elect Members of Parliament (MPs) to the House of Commons. The UK is divided into 650 constituencies, and at the election, the candidate with the most votes becomes the MP of that area. An outright majority vote for a particular party, i.e., winning 326 seats, will place its leader at 10 Downing Street as the new UK PM on 5 July. The new PM will then appoint Ministers to their Cabinet. However, should a single party fail to achieve a majority vote, we will have a ‘Hung Parliament’, with no party having overall control. In such situations, the PM in power before the general election is given the first chance to create a government. However, usually, the party with the most seats will try to form a coalition government as they are more likely to secure a majority and the confidence of the House. There have been four such occurrences since 1945, with the latest being in June 2017 when no party won an overall majority, and the Tories formed a minority administration after negotiating with the Democratic Unionist Party.
The Conservative and Labour Manifestos at a Glance
Conservatives | Labour |
|---|---|
No increases in income tax, national insurance, VAT, corporation tax. | No income tax, national insurance or VAT rises. |
No further council tax bands; no cuts to council tax discounts. | Link minimum wage to cost of living; lower rates for 18-22-year-olds to be scrapped. |
Cut national insurance by a further 2%; abolish it altogether for the self-employed. | Cap corporation tax at 25%. |
No new taxes on pensions. | 10-year infrastructure strategy for rail, road, and homes. |
Is Labour on Course to Win a Record Majority?
The battle lines have been well and truly drawn as we enter the final days of election fever and political campaigning. Leaders’ debates, interviews, and nationwide rallies will continue up until the election date. And then, between 7 am and 10 pm on 4 July, the UK heads to the ballot to vote on which party they want running the country.
Current polls suggest Labour’s Starmer will be the next PM. Although Starmer’s Labour has seen moderate dips in the polls, it is ahead of the Conservative Party by an average of 20 points. Most polls seem to agree that the Conservatives are headed for a crushing defeat, with some published last week indicating that Labour could win up to 450 out of the 650 seats in the House of Commons, and even go as far as suggesting Sunak may become the first ever sitting PM to lose his seat at a general election.
What Role Did the Economy Play in Past Elections?
Although the UK economy is performing better, with the latest data indicating that inflation eased to 2%, according to Fitch, there is no expectation that the recent economic uptick will benefit the Conservatives. In analysing every election since 1959, they found that there was no relationship between indicators of economic well-being and electoral outcomes for the serving government. For example, significant improvements in consumer outlooks or real incomes did not lead to a better result for the government in the election, and vice versa.
Interestingly, Fitch argues that what determines a shift in government most of the time is not the economy’s performance but instead time spent in power. Although support for a party starts out strong, this declines over time until a new party with different ideas is elected. They cite the Thatcher/Major and Blair/Brown years as such scenarios and suggest this does not bode well for the Conservatives, who have been in power for 14 years; recent polls also seem to be pointing in this direction.
Current Economic Landscape
The economic landscape is always widely discussed and debated before a general election.
The latest CPI inflation data show that inflation slowed to +2.0% in the twelve months to May, down from +2.3% in April. This was welcomed news by PM Rishi Sunak and Bank of England (BoE) Governor Andrew Bailey, as it reached the BoE’s inflation target of +2.0%.
Headline CPI inflation cooled to +2.0% in the twelve months to May, matching market expectations. This is quite the milestone, considering UK inflation was +11.1% in October 2022. Year-on-year core inflation also equalled expectations, easing to +3.5% in May, down from the +3.9% print recorded in April. Headline inflation was unchanged month-on-month, rising +0.3% and slightly softer than the expected +0.4%. Meanwhile, month-on-month core data slowed to +0.5% as forecast, from +0.9% in April.
Services inflation and wage growth are still proving problematic or sticky. Although services inflation cooled to +5.7% in May, from April’s +5.9%, the release was still 0.2 percentage points north of the market’s median estimate (+5.5%) and above the BoE’s +5.3% forecast. Wage growth remained unchanged in the three months to April (3MYY); pay that excludes bonuses remained at +6.0%, matching both expectations and prior data, while pay including bonuses came in at +5.9%, equalling previous data but slightly higher than market expectations. In addition, unemployment rose to 4.4% in the three months to April 2024, recording a fourth straight advance and reaching its highest reading since late 2021.
In terms of where we are with GDP growth, economic activity in the UK increased by +0.6% in Q1 this year, following consecutive quarters of declines, effectively pulling the economy out of a shallow technical recession, which was above both Bloomberg and Reuters, as well as the BoE’s forecasts. It was a strong release, to say the least, one which was also, of course, welcomed by the current PM. We have since had the monthly GDP report, which estimated no growth in April 2024, following GDP growth of +0.4% in March.
Overall, the BoE is expected to begin easing policy this year, with some desks leaning towards August’s meeting; others, nevertheless, are looking further out in the year.
How Will the Election and Its Result Impact the GBP?
The British Pound (GBP) and the broader financial markets dislike uncertainty and surprise; these elements can significantly elevate volatility across key asset classes and profoundly affect the economy.
The GBP has performed poorly against the US dollar this year (-0.5%) but is +2.3% higher against the euro (EUR). Ultimately, the upcoming election is unlikely to surprise the markets, with volatility leading up to 4 July likely to be somewhat subdued.
The technical picture for the GBP/USD on the daily timeframe shows the price elbowed beneath support at $1.2683 and has since formed a fresh lower low, indicating the possibility of an early downtrend.
Should the election outcome proceed as polls suggest – a Labour victory – this could moderately bolster the GBP, though, similar to the Labour win in 1997 following 18 years of Conservative government, it is unlikely to generate meaningful upside. We could see the GBP/USD tackle the resistance area between $1.2817 and $1.2795, potentially breaching the June $1.2860 peak and test resistance from $1.2890.
However, a Hung Parliament or a Conservative win would increase the ‘surprise factor’ and, therefore, elevate volatility in GBP currency pairs. This could see the GBP pulled lower against the US dollar, potentially targeting support from $1.2527 and perhaps as far south as $1.2406.