Markets left barely stirred by Labour’s thumping election win | Economics

Shares rose a bit. The pound barely budged on the currency markets. There was no shortage of demand for UK government bonds. A dramatic night in politics left the City relatively unmoved.

There were three big reasons for that. The first was that a thumping Labour victory had been expected for months. It was, in the parlance of financial markets, fully priced in. A hung parliament would have been a different story but there was never any real prospect of that, and once the results of the exit poll were announced the result was not in doubt. International investors are far more worried about what might happen in the second round of the French elections on Sunday than they were about the outcome in the UK.

The second reason there was only the slightest of reaction to the biggest Conservative defeat in history is that the markets think little will change. The small opening rise in the FTSE 100 index of leading London shares was led by housebuilders in anticipation of changes to planning law but Labour’s economic plans are modest and cautious. It has ruled out big increases in spending and taxes and will be subject to rules governing how much it can borrow.

This is neither 1945, when a Labour government came to power on a radical socialist manifesto, nor 2017, when a victory for Jeremy Corbyn certainly would have caused a stir in the markets. Rachel Reeves has spent a lot of time convincing the City that she will be a safe pair of hands as chancellor and it has paid off.

The final reason for the serene response in the markets to Labour’s win is the belief that the worst is over for the economy. A global pandemic and the energy crisis prompted by Russia’s invasion of Ukraine have meant the period since 2019 has been something of an economic horror show.

The Conservatives have been severely punished for presiding over the highest inflation in 40 years, the higher mortgage rates that resulted from Liz Truss’s disastrous premiership, and for living standards being lower at the end of the last parliament than they were at its start. Without question, the election was a rejection of the Conservatives rather than a strong endorsement for Labour.

The scars from the coronavirus pandemic have not yet fully healed but the impact of the cost of living crisis is fading. Growth is picking up and inflation is back to its 2% target. Real incomes are rising and the Bank of England will soon start to cut interest rates, perhaps as early as next month.

In the event of another adverse shock on the scale of Covid-19 or a war in eastern Europe, Labour’s economic plans would be thrown into chaos. But, on the assumption that there is nothing else nasty lurking out there, the financial markets think things are looking up for the UK, and that cautious optimism explains why they are so chilled about Sir Keir Starmer moving into 10 Downing Street.