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May 3, 2024

News in Charts: UK elections through a macro lens

by Fathom Consulting.

This week’s local elections reaffirmed the poor prospects for the UK’s governing Conservative Party ahead of the upcoming general election. At the time of writing, only 38 of 107 councils have declared, but we do already know that the Conservatives have lost more than 130 councillors (about half of their seats), with the Labour Party taking around 40% of those lost. A large Conservative majority in the Blackpool South constituency was also overturned by Labour in a by-election. Last year, Fathom argued that economic factors were unlikely to reverse the party’s fortunes. Although economic data outturns have improved slightly since then, we stick to that view. This note explains why.

Economic studies often find that a relationship exists between support for incumbent parties and macroeconomic variables such as economic growth, inflation and unemployment. Moreover, Fathom research has found that these three factors (plus house prices) also have a tangible impact on consumer confidence. With this in mind, we now consider the outlook for each of these four variables in turn.

Fathom expects the transatlantic divergence in economic growth to persist over the near term. Indeed, while four-quarter US GDP growth remains close to 3%, the UK economy has essentially flatlined over that same period. With interest rates still elevated, and the potential for additional tail risks (including higher-for-longer rates, global trade wars, and the risk of geopolitical disputes), Fathom’s mean path for UK GDP, shown in the chart below, will make grim reading for incumbent prime minister Rishi Sunak.

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We do not currently have a firm grasp on UK labour market data due to issues with the ONS’s survey (the response rate to their Labour Force Survey has dropped significantly since the pandemic). However, to the extent that we can trust the data that are reported, they suggest that unemployment is beginning to trend up slightly, albeit at a very slow rate. An alternative measure, the claimant count, also supports this assertion.

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Want more charts and analysis? Access a pre-built library of charts built by Fathom Consulting via Datastream Chartbook in LSEG Workspace.

Mr Sunak may however find some comforting news on the inflation front. UK headline CPI fell to 3.2% in March, and Fathom expects it soon to drop below the Bank of England’s target of 2%, in part due to the decline in utility prices. Core inflation (which strips out food, energy, alcohol and tobacco prices) is falling too, although it remains elevated. Faced with cooling inflation and anaemic economic growth, Fathom expects the Bank to begin loosening policy this summer.

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Data released by Nationwide on Wednesday showed that UK house prices fell by 0.4% in April. After a bit of a recovery towards the end of last year, this latest setback will be unwelcome news for politicians and homeowners alike (though not for prospective first-time buyers), and it compounds recent news from a similar index produced by Halifax. Some signs of momentum might be found in mortgage approvals data, but it should be noted that the levels remain weak by historical standards.

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Inflation aside, none of this paints a particularly rosy picture for the prime minister’s odds of success in the upcoming general election. Moreover, while he might claim success on inflation (although maybe he ought to credit the Bank of England for that), many people think of prices in terms of their nominal level as opposed to their rate of change, and aggregate prices remain much higher than they were at the time of the last election. In short, Fathom (and most other commentators) see the odds of a Conservative win as extremely slim.

The views expressed in this article are the views of the author, not necessarily those of LSEG.


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