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UK Market & Economic Prospects Under a Labour Government

Estimated reading time: 6 minutes


By Colin Wright, Uspire Chair

Here are my thoughts on Labour's victory.

In the words of Monty Python “So what have the Romans ever done for us?” 

The Labour Party has won the UK general election - this is really not a surprise given the polls that consistently showed them as the favourites and Rishi Sunak appeared to be distanced by his party and prone to shooting himself in the foot. 

Despite the medias opinion that Keir Starmer has been mostly underwhelming the country was poised to protest about the general state of the UK economy and a need for change. However despite the financial institutions in general not favouring Labour policies there have been no dramatic shifts in markets as a result of the news this morning, largely because it was already priced-in by markets. The UK government bonds have fallen very slightly but appear to have stayed relatively calm, while sterling has remained steady against the US dollar and other currencies. As for stock markets, the FTSE 250, which consists of domestic UK stocks, reacted positively and the FTSE 100 rose slightly on the news. 

The Labour Party’s victory does however mark a significant shift in the political landscape, with potentially far-reaching implications for the market and economy. This change in leadership is expected to influence economic policies, investor sentiment, and the broader economic environment in several ways. Although policy changes under a Labour government will take time to materialise, as immediate changes are unlikely. Any future policy changes, such as those outlined in the party’s manifesto, will need to go through the rigorous process of discussion and debate by MPs before being approved by Parliament. Organisations like the Office for Budget Responsibility will closely monitor any financial impact. 

Here is my analysis of the prospects for the UK market and economy under the new Labour government. 

Economic Policies and Priorities 

Fiscal Policy 
The Labour Party has historically emphasised increased public spending, particularly in areas like healthcare, education, and social services. The new government is likely to prioritise these sectors, leading to a substantial increase in public expenditure. While this could improve public services and stimulate economic growth in the short term, there are concerns about how it will be funded. Higher taxes on corporations and high-income individuals are expected, which might impact business investment and consumer spending. 

Infrastructure Investment 
Labour’s manifesto highlighted significant investment in infrastructure, including transport, housing, and green energy. Such investments are intended to create jobs, boost productivity, and support long-term economic growth. The focus on green energy aligns with global trends towards sustainability and could position the UK as a leader in this sector, potentially attracting foreign investment. 

A progressive tax policy is likely to be implemented, aiming to reduce income inequality. This includes higher taxes for the wealthy and corporations, along with efforts to close tax loopholes. While this may increase government revenue, it could also lead to capital flight or reduced incentives for business expansion. 

Monetary Policy and Inflation
The Labour government is expected to work closely with the Bank of England to ensure that monetary policy supports its economic agenda. With increased public spending, there might be upward pressure on inflation. Managing this without stifling growth will be a key challenge. Interest rates may need to be adjusted to keep inflation in check, impacting borrowing costs for consumers and businesses. 

Market Reactions and Investor Sentiment 

Stock Market 
Investor sentiment towards a Labour government is mixed. While some sectors, particularly those aligned with public investment and green energy, may benefit, others might face challenges. Financial services and large multinational corporations might be concerned about higher taxes and increased regulation, potentially leading to a period of market volatility as investors reassess their positions. 

Foreign Direct Investment (FDI) 
Labour’s policies could have a dual effect on FDI. On one hand, increased investment in infrastructure and green technology might attract investors looking for stable, long-term returns. On the other hand, higher corporate taxes and regulatory changes might deter some foreign businesses. The overall impact on FDI will depend on how these policies are implemented and perceived by the global investment community. 

Property Market 
The focus on affordable housing could lead to changes in the property market. Increased construction of public housing could alleviate some pressure on housing demand, potentially stabilising property prices. However, higher taxes on property investors and developers could reduce investment in high-end development projects. 

Sectoral Impacts 

Healthcare and Pharmaceuticals 
Increased public spending on healthcare is expected to benefit this sector. Pharmaceutical companies might see increased demand for their products, although there could be pressure to reduce drug prices and increase transparency in pricing. 

Renewable Energy 
The Labour Party’s strong emphasis on green energy is likely to boost the renewable energy sector. Investments in wind, solar, and other renewable sources could create jobs and drive innovation, positioning the UK as a leader in sustainable energy. 

Financial Services 
The financial sector might face increased regulation and higher taxes. While this could lead to some firms relocating or reducing their UK operations, it also presents an opportunity for the sector to adapt and innovate, potentially leading to a more sustainable and transparent financial system in the long term. 

Technology and Innovation 
Labour’s focus on education and skills development could benefit the technology sector by creating a more skilled workforce. Additionally, public investment in research and development could spur innovation, particularly in fields like artificial intelligence and biotechnology. 

Long-Term Economic Prospects 

Growth and Stability 
Labour’s policies aim to create a more inclusive and equitable economy. While the immediate impact might include increased public debt and higher taxes, the long-term goal is to build a stable, sustainable economy. Success will depend on the effective implementation of these policies and the ability to balance growth with fiscal responsibility. 

Income Inequality 
Efforts to reduce income inequality through progressive taxation and increased public spending on social services could lead to a more balanced economic landscape. This might result in higher overall consumer spending, as lower-income households typically have a higher marginal propensity to consume. 

Trade and International Relations 
Labour’s stance on trade and international relations will also influence the economy. A more protectionist approach could impact trade relationships, while efforts to strengthen ties with the EU and other trading partners could boost exports and economic growth. 

What do the banks think? 

Barclays Bank and other UK banks have largely responded with cautious optimism to the Labour Party’s general election victory. Barclays, along with other financial institutions, indicated that the result was anticipated and thus already factored into market prices, leading to minimal immediate market disruption. They emphasised a commitment to continue supporting business growth despite the political changes . 

Fahad Kamal, Chief Investment Officer at Coutts, said: “In terms of what this means for the UK population and our customers, we will closely monitor the developments of a Keir Starmer’s government and its potential impact on markets. 

“It’s worth noting, though, that history shows elections generally don’t tend to have a long-term impact on markets. They can create short-term shifts, but investors usually get past that and refocus on fundamentals such as company earnings, employment, and economic growth.” 

Despite the election, it appears to be a case of ‘business as usual’ for the UK, said Fahad. 

“An ongoing recent trend has been falling inflation, which even dropped to the Bank of England’s (BoE) target of 2% last month,” he said. “We believe it will remain broadly in line with that target over the rest of this year.” 

As a result, while the BoE held interest rates at 5.25% for the seventh time in a row last month, there are strong expectations of imminent rate cuts. This could, over time, improve the country’s economic growth by encouraging people to borrow and spend rather than save. 

In summary 

The Labour Party’s victory ushers in a new era for the UK economy, with significant changes expected in fiscal policy, market dynamics, and sectoral performance. While there are potential risks, particularly related to taxation and regulatory changes, there are also substantial opportunities, especially in infrastructure and green energy. The long-term economic prospects will hinge on the effective implementation of Labour’s policies and their ability to foster a balanced, inclusive, and sustainable economic environment. Investors and businesses will need to navigate this new landscape carefully, balancing risks with the opportunities presented by a government committed to transformational change. 

So let’s wait and see what the Romans, sorry, the government, will do for us? 

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