HAMISH MCRAE: The promise of riches must be met

Let’s step back from the politics, of which there will be more than enough in coming weeks, and focus on the economic inheritance of the next Government. 

It is not a bad hand at all, though given the most likely Election outcome, the incoming Labour team will claim it is a terrible one.

The broad economic outcomes for the rest of this year are pretty clear. 

What's next? The broad economic outcomes for the rest of this year are pretty clear

What’s next? The broad economic outcomes for the rest of this year are pretty clear

There will be two or three cuts in interest rates from the Bank of England. Headline inflation will dip below 2 per cent, leading to a sharp rise in real wages. 

House prices will resume their slow climb, though don’t expect fireworks because the fall in mortgage rates will be muted.

That will be largely because the Government is still borrowing a huge amount of money, holding up longer term yields on gilts.

And the economists are all busy revising their growth forecasts upwards. I could see 2024’s final GDP figure turning out to be well above 1 per cent, perhaps close to 2 per cent.

How will the markets respond? We’ve see the start of a reassessment of FTSE 100 companies as a place to invest, but that’s really part of a global movement where value shares are being up-rated vis-a-vis growth ones – with the exception, of course, of AI-associated enterprises. 

In any case, Footsie firms make 80 per cent of their earnings from outside the UK, so this is not saying much about the domestic economy.

However, there has been a gradual rebuilding of confidence in the country’s economic management under Rishi Sunak that will continue if Keir Starmer does get a majority. 

So the re-rating of UK assets has further to run. It would be very helpful, too, if there were an upgrading of sterling. That would hold down import costs, which would feed through to lower inflation overall.

The pound is clearly undervalued, but how quickly that corrects depends on what happens to the dollar. Nice to have a stronger pound, but we may have to wait and see what happens on the other side of the Atlantic to get it.

All good so far. But there is a vast, dark, glowering cloud over the UK and indeed most of Europe too. It is that we are not improving people’s living standards nearly as fast as in the US.

That affects politics because, if a Government cannot create the conditions where each generation has a decent chance of being richer than their parents, voters will want to try someone else. 

They are grumpy in the US too, but consumption there is quite a bit higher than it was before the pandemic, whereas here it isn’t.

That is the great challenge facing the next Government. How do we help make people richer? In that famous phrase of Bill Clinton’s strategist James Carville: ‘It’s the economy, stupid.’

It is about productivity, and our failings are in large part the fault of successive governments. The problem starts at home. Public sector productivity is lower than it was when Tony Blair took office in 1997. 

But equally important, the next Government needs to think about the cost of its regulation and tax policies. 

Why do firms choose to invest elsewhere? Is our education up to scratch? How do we reform a dysfunctional planning system, when we desperately need more homes? There are profound concerns about the competence of our governance. Why have the two greatest long-running injustices of recent years – the treatment of sub-postmasters and the infected blood scandal – happened in the public sector?

There are a string of questions about our financial system, many of which we have hammered on about in these pages.

Why don’t our pension funds invest in British equities? To what extent has our system of financial regulation encouraged private equity rather than public markets, thereby denying ordinary investors opportunities to share the growth?

This can all be fixed. To do so needs quiet, calm, non-political analysis. 

We need to be honest with ourselves, to recognise we are doing some things well and to cherish those, but to acknowledge other areas where we have utterly failed – and do something about them.

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