Following such a momentous event in UK history, it would be remiss of us not to consider some salient points regarding the election result.
On paper, it’s a Labour landslide of course. The party has a majority of more than 170 seats, close to that achieved by Tony Blair in 1997. But there was no surge in support for Labour, with less than 40% share of the vote. The story of the election is likely to be remembered as the extent to which Reform split the Tory vote.
So far, the markets are unmoved. The outcome was in line with expectations and therefore it’s been fully priced in. In early Friday morning trading the UK Index was up marginally (as European stocks rose), gilt-edged securities were broadly unchanged and sterling also remained unchanged against key pairs on the foreign exchanges.
The election certainly marks a big political change for the country but not necessarily for the economy. The incoming administration faces the same fiscal constraints as the outgoing one. So, we would expect no major changes to growth, inflation or interest rate outlook forecasts, although potential policy yet to be announced may nudge GDP growth forecasts slightly higher. In the event of a higher minimum wage, the result could be slightly higher inflation and by extension, the Bank of England may not cut interest rates quite as aggressively as had previously been thought probable.
However, Labour is in no hurry to rush out a post-election budget. The party will enjoy an economic tailwind as growth persists and its large majority reduces the necessity to placate fringe MPs with expansionary policy (to the extent that they’re able). Furthermore, waiting may allow the public finances to improve sufficiently to embark on some (though probably not all) spending plans without necessarily having to raise taxes too aggressively.
That said, Labour’s first 100 days in office may include some low-cost ‘easy wins’, including housing market reform and an increase in residential investment which would be comparatively ‘costless’.
With regard to fiscal policy, Labour’s plans to ‘top up’ overall public spending, which is likely to be earmarked for schools and the NHS, so far offers a relatively small number (c.1.2% versus the Conservatives’ 1.1%). This would be unlikely to upset the markets.
For any spending over and above the plans laid out in the manifesto then additional taxes might be necessary. There is, however, no fiscal ‘black hole’ that we’re aware of that might upset the party’s plans.
Office for Budget Responsibility (OBR) forecasts are thought to be likely to allow c.£16bn ‘headroom’ for spending versus the £9bn that appeared in the March budget. However, this will be insufficient to support all Labour’s spending plans, so some prioritisation is thought likely.
There is no silver bullet (otherwise it would surely have been fired already) and a package of both short-term and longer-term measures will be required to support economic growth. As noted, homebuilding adjustments (planning reform, new towns, social housing and compulsory purchase orders) are a comparatively low-cost ‘easy win’ in the short-term. Another upside is that a boost to residential investment could result in an increase in business investment which could lead to a focus on more long-term projects (but keep an eye on the detail for workability).
Fiscal constraints may not be a major bind on the incoming government, but supply-side reform will be essential. Slow productivity growth is partly due to insufficient investment. This is as much a function of cyclical, rather than structural drags however, and the ongoing rollout of generative AI could prove a handy positive to counter this.
Importantly, increased investment requires increased savings to fund it (unless the current account deficit, already high, is allowed to slide further… this will be unwelcome by the markets). Therefore, watch for plans to boost savings including, notably, the potential for increased pension contributions for both employers and employees. Pension reform could prove to be a key focus for the new administration.
Back to housing, and whilst plans may be relatively costless, they could still take time. Of greater help would be a further increase in house prices and that is a function of monetary policy. Falling base rates should help support house prices, though likely more in 2025 than the current year.
Might debt interest costs act as a constraint? Interest costs on prevailing debt were c.5% pre-pandemic rising to 9.5% in the last fiscal year. The OBR forecasts interest costs will drop to c.8.3% in five years’ time but a strengthening economy and lower interest rates could speed up that anticipated drop.
On labour market reform we might expect to see a further increase in the minimum wage and possible expansion of workers’ rights. Wage growth at 5.5%-6.0% remains too high for the Marginal propensity to consume’s (MPC ) comfort and the pace at which it drops to the 3.5% level is thought to be consistent with 2.0% inflation, which may slow as a result of any plans to make the labour market less flexible.
The real labour market issue is, however, the relationship between the demand for and supply of labour and at present, the party’s envisaged plans should not represent a game changer to a slowly loosening labour market.
On monetary policy meanwhile, no major changes to the rate outlook appear likely but there is a slight upside risk to the consequence of a possible hike in the minimum wage.
Risk warning: Opinions constitute our judgement as of this date and are subject to change without warning.
Black MondayOn 19 October 1987, the stock markets experienced a dramatic plunge that prompted many firms to shut down their trading desks and turn off their phones to minimize internal losses. Raymond James refused to do the same. Our desks stayed open to help meet clients’ needs, resulting in our first and only unprofitable quarter since the firm went public in 1983. |
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Who was Raymond James?The Raymond in our name is actually from Edward Raymond, owner of a 15-employee mutual fund sales group, Raymond and Associates, along Florida’s west coast. He sold his company to Bob James on 15 July 1964, on condition that the surviving firm be called Raymond, James & Associates. Three days after the sale, Ed Raymond was involved in a near-fatal automobile accident and never joined the firm. Nonetheless, even after Raymond had passed away, Bob James insisted that his name remain on the door – ahead of James’ own. That was a promise he made to Ed Raymond three days before the accident, and Bob James was a man who kept his promises. |
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Bear Market of 1974The severe bear market of 1974 threatened the existence of Raymond James, which was bleeding capital by the day. Tom James, his father and other leaders took extreme measures to keep the firm afloat, slashing costs, foregoing paychecks and even attempting to sell the firm for just enough capital to protect client assets and retain as many associates as possible. The story could have ended very differently if not for a sharp upturn and continued rebound in the stock markets late in the year. |
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Taking Raymond James PublicWhen consideration was being given to taking Raymond James public, Tom James penned a letter to shareholders (largely employees at the time). ” … the public offering should be considered as a statement of our independence. While this is a psychological rather than an economic rationale, it is nonetheless very important. We have asserted for some time that we are not interested in becoming a small part of a very large corporation. That assertion results mainly from the inclinations of management rather than the economic benefits associated with either alternative. The public stock offering affords us the opportunity to enjoy a little bit of the best of both worlds. While shareholders will be given liquidity at fair market value, we will still have the ability to control our own destiny.” After 40+ years of Tom’s leadership, upon becoming CEO, Paul Reilly was often questioned about whether the company might ultimately surrender its cherished independence and be acquired by some larger entity. His response: “Not while I’m around.” It’s a theme that continues today. |
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