Sunday, June 11, 2017
Hung vote hangs over the economy
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

This time last week I devoted quite a lot of space to the prospect of a hung parliament, pointing out that whereas two years ago it was the expected outcome for one Tory prime minister, David Cameron, this time it would be seen as a catastrophe for Theresa May. Combine a hung parliament with EU exit negotiations scheduled for June 19, and you had a recipe for something really destabilising.

Though a hung parliament was a risk, as set out then, I thought along with most other people that the Tories would secure a somewhat larger majority than the one May inherited from Cameron. It would have been one of the least deserved majorities in recent political history. So, while a hung parliament has made us something of a laughing stock and is on the face of it bad for the country – more in a moment on whether it is or not – there was quite a lot of poetic justice in it.

Why undeserved? Any prime minister who ignores the economy in an election campaign and expects voters to troop loyally into the polling booths when their real wages are falling did not deserve victory. People need something to latch onto, some grounds for economic hope and May’s Tories did not provide it. Austerity fatigue is another factor on which no reassurance was offered.

I also think that she made a huge miscalculation, which goes back some time, about Brexit. As a Remainer, albeit a soft one, she overcompensated by either focusing exclusively on the 52% who voted to leave the EU – and implying that those did not were “citizens of nowhere” – or wrongly suggesting that the country was coming together on the issue when it was clearly not. As many people think it was wrong to vote to leave the EU as think it was right,
according to polls. Some out and out Leavers, such as the Brexit secretary David Davis, took a more conciliatory approach to Remainers.

And the hard line Brexit that she decided on – out of the single market and customs union and cutting net migration to less than 100,000 a year, even apart from the “no deal is better than a bad deal” nonsense – appeared designed to inflict maximum damage on the economy.

What does the hung parliament mean for the economy? I think it useful to split this into the short term and the longer-term.

In the short-term, the uncertainty generated by the election means weaker growth is likely to persist. Election uncertainty may have helped depress the housing market and house prices, according to Rics, the Royal Institution of Chartered Surveyors, though housing has been on a weakening trend. The election result has come at a time when the economy too has entered a weaker phase.

Figures on Friday showing weak construction and industrial production figures for April, combined with evidence that May was a poor month for retailers, suggest the economy’s weak start to the year has continued. The National Institute of Economic and Social Research estimated growth of just 0.2% in the three months to May, the same as in the first quarter.

The Organisation for Economic Co-operation and Development (OECD) attracted headlines a few days ago for a downbeat forecast for Britain’s economy, and for suggesting that the government should use the “fiscal space” afforded by low interest rates and the long average duration of government borrowing (the number of years on average that gilts have before they mature), to borrow a lot more for infrastructure investment.

The OECD thinks the Brexit negotiations will weigh heavily on the economy, producing the unusual situation for Britain in which an acceleration in the global economy, from 3% growth last year to 3.5% this and 3.6% next, is accompanied by a slowdown in Britain’s economy, from 1.8% last year to 1.6% this and just 1% in 2018.

The OECD’s forecasts brought to mind a question I am often asked: where will the growth come from? The challenge here is easily stated. Britain’s economy has been, and continues to be, highly dependent on consumer spending. When consumers sneeze, as they did in the first quarter in slowing their growth in spending to a modest 0.3% (with retail sales actually falling), the economy catches a cold.

The drivers of consumer spending are, moreover, looking much weaker. The Brexit-induced rise in inflation has produced a return to falling real wages, which is set to last for some time.

Households’ ability to carry on piling up consumer credit and run down savings, highlighted by the OECD as one of the main means by which the economy has been kept going, does not look sustainable for much longer. The credit card looks as if it is getting close to being maxed out.

When I am asked the question about where the growth will come from, my usual response is to talk about trade. Notwithstanding the disappointing performance of exports so far, the fair wind of a cheap currency and a strengthening global economy, and in particular a strengthening European economy, must surely be good for Britain’s overseas trade.

These are the circumstances in which exports should flourish and we should hope they do, although, as I noted last week, they cannot be turned on with the flick of a switch. Export disappointment is not just a short-term phenomenon. One measure of how exporters are doing is the relationship between their performance and the growth in Britain’s export markets.

As the OECD pointed out, one of those, the growth in exports, has consistently fallen short of the other, the growth in markets. Britain’s export market share has been on a declining trend. The OECD’s index of UK export performance has seen a decline of more than 30% since the mid-1990s. You can lead a horse to water but you cannot make it drink.

So the next couple of years will be a challenge, and if the OECD is right, it will not end there. It is assuming that there will not be a workable EU deal and Britain will revert to World Trade Organisation rules. Is that assumption, made ahead of the election, still valid?

One reason why the market fallout from the election has not been as big as feared is because of the belief among analysts that it will pave the way for a softer Brexit. It may be that the prime minister, if she survives, will be obliged to work with other political parties in a more consensual approach. Leaving the single market and customs union would be up for grabs, and May’s lonely Home Office pursuit of reducing net migration to less than 100,000 a year would be shelved. The no deal option would be dumped.

That would be my hope, but is it wishful thinking? Listening to May’s Downing Street statement on Friday when she declared that she was forming a government, it was hard to detect than anything had changed, including her dashed hopes of a bigger majority. That may be just her style. It is not the only thing that will need to change.