Experts predict a focus on economic growth through increased public investment but budgetary questions grow about potential tax increases with some experts anticipating stability and others being cautiously optimistic.
Schroders senior European economist & strategist Azad Zangana says: “In the near-term, the economy is set to rebound following a recession at the end of last year, but structural challenges remain including an ageing population and strained trade relationships. Reforming the planning system and making the UK a more attractive destination for foreign direct investment should be top of the government’s priorities.
“The likely new chancellor Rachel Reeves plans to exclude public investment from the government’s self-imposed borrowing rules. This is a signal that Labour plans to borrow more to invest. The lines between public current spending and investment have in the past been blurred, which may in time raise some concerns.
“Moreover, there is a general expectation that some taxes will have to rise in due course, despite Labour’s manifesto pledge to freeze most personal taxes. This will be difficult given the “fiscal drag” which is occurring as the result of frozen income tax thresholds for the past seven years.
“Overall, the change in government, particularly with such a large majority, should reduce political instability for the nation. A change in the direction of policy back to growing public services is likely to lead to looser fiscal policy and boost economic growth.
“However, the significant support for Reform UK is likely to put pressure on Labour to restrict inward migration. This would limit the economy’s growth prospects as its aging population is already impacting staff availability, pushing wage inflation higher.
“Given the result was largely as expected, there has been little to no reaction from markets. Members of the Monetary Policy Committee at the Bank of England have not been allowed to give speeches in recent weeks owing to election purdah rules. They are, however, expected to return to public speaking soon, and again start to signal imminent cuts to interest rates, potentially from August onwards.”
TPT Retirement Solutions chief executive David Lane says: “Like their predecessors, Labour hopes to encourage pension schemes to provide more productive investment in the UK economy. We expect trustees will be open to increasing allocations, however, they will still have to prioritise investment performance, in line with their fiduciary duty. Labour’s proposed requirement that all UK-regulated financial institutions and FTSE 100 companies develop and implement credible climate transition plans could also increase the opportunities for responsible investment.”
Redmayne Bentley head of the Manchester office James Igoe says: “While a Labour victory was expected, it is hoped the result could inspire a UK stock market revival. It is crucial the party makes the UK economy more attractive and enhances liquidity in the market, especially from overseas investors. Foreign investors have, for some time, considered the stock market to be a function of the UK’s leadership. As such, it has significantly suffered during times of stress, reducing allocations to UK equities and pension funds. Firms such as ARM listing abroad are a reflection of this in recent times.
“This has not been helped by the volatility in sterling and gilts. After Liz Truss’s mini-budget in 2022, volatility in UK gilts was extremely distressing for many and some of the highest in recorded history. Arguably, a Labour government reduces the risk premium on UK stocks if it can deliver greater stability over its term in office.
“We expect to see an increased focus on cleaner energy with the creation of the £8.3bn Great British Energy fund and co-investing in technologies to boost the production of eco-friendly alternatives. This will likely mean the demand for nuclear power will surge. However, these environmentally-friendly approaches are a potentially positive step for UK commerce.
“Given the party’s pledge to build 1.5m new homes, this will present a huge number of opportunities in the housing sector. We expect this will take time to deliver, given the constraints around planning and the pricing dynamics of land and materials. This may continue to impact on the ability of housebuilders to deliver new housing targets.
“Ultimately, it is vital the new government rapidly revitalises the stock market, attracts companies to list in the UK, and delivers true economic growth to underpin domestically-represented businesses.”
Cardano senior investment strategist Ina Rinas says: “The polls were right – today the UK wakes up to a new Government. The Labour party has secured a landslide victory. Nevertheless, the Labour party’s dominance at the ballot box does not usher in any profound change in the direction for the UK’s finances nor its economic trajectory. The extent to which any expansionary public spending is possible is limited by the UK’s net debt rule – meaningful surprises on fiscal policy are unlikely. Our economic projections forecast modest improvements in economic growth, following the technical recession at the end of last year.
“The immediate market reaction has been positive on the margin. In overnight trading sterling (traditionally the best gauge of market sentiment on politics) was 0.05 per cent stronger against the US Dollar and flat against the Euro, which would have been muted due to the 4th July holiday in the US. The 10-year gilt yield has fallen by three basis points and FTSE-100 futures have risen by 0.3 per cent on the London open.
“The Bank of England will continue to conduct monetary policy independently. The election result will have little bearing upon their decision-making. Whilst headline inflation fell to match the Bank’s 2 per cent target last month, we continue to expect the Bank to move cautiously. Services CPI, a key point of focus for the Bank, remains elevated and sticky. We do however expect underlying inflationary pressures to ease gradually through the year and for the Bank to start cutting rates in August.”
