Five years ago, the prospect of a landslide Labour election victory might have been expected to prompt at least some anxiety in financial markets. In a sign of how successful Keir Starmer’s campaign to woo the City and move his party’s position to the centre has been, markets barely budged in response to news that a vote would be held this summer.
The FTSE 100 opened flat on Thursday, the pound pushed slightly higher and stock futures a touch lower as markets appeared relaxed about the likelihood of a Starmer win, having had more than a year of reading about 15-point-plus poll leads to get used to the idea.
“A Labour government is not considered to be a risk scenario; in fact, investors seem sympathetic to the idea,” said Roman Ziruk, a senior market analyst at the global financial services firm Ebury. “Investors want stability, and we are now at a stage whereby a Labour majority, while heavily priced in, would probably be perceived by them as a mild positive for sterling, even if only due to the avoidance of a dreaded hung parliament.”
While there are a few bits of economic data still to come before 4 July that could move the dial, most investors are working on the assumption that Starmer will be the next prime minister. If that comes to pass, many foresee a similar market response to Tony Blair’s landslide victory in 1997, in which traders were reassured by a widely expected outcome. “Basically, markets just rallied straight through … There wasn’t a lot of policy change on the table and there wasn’t a lot of election uncertainty,” said Ben Laidler, a global markets strategist at the trading platform eToro.
Starmer’s message may be “change” but he may turn out to be unable and unwilling to enact a significant shift in economic policy. A spending bonanza is unlikely, given recent memories of the economic calamity that followed Liz Truss’s unbalanced mini-budget in September 2022.
He may have no choice but to increase taxes to meet spending commitments. A pledge to stick to the existing fiscal rules, overseen by the independent Office for Budget Responsibility, leaves him little room for manoeuvre.
Under these rules, recent budgets have pencilled in a 1%-a-year real-terms increase in spending. However, once spending pledges in areas such as health and defence are accounted for, that translates to a real-terms cut for unprotected departments, especially as higher inflation means hospitals, prisons, schools and councils are able to buy less with the same budget.
“There’s a general sense that given the challenges in public services, these real-terms cuts will be difficult to achieve in practice and will require greater spending commitment,” said James Smith, a developed markets economist at ING. “There’s very limited room to address this without raising taxes.”
As for Rishi Sunak’s chances, Philip Shaw, the chief economist at the international wealth management group Investec, pointed out that he may have chosen an election date of 4 July in the hope of getting a fillip from a possible interest rate cut by the Bank of England two weeks before that.
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However, the prospect of such a lifeline seem to be fading. On Wednesday morning it emerged that inflation had fallen by less than forecast in April, to 2.3%. Since then, market bets on when the Bank will bring the cost of borrowing down from the current 5.25% have become less optimistic.
On Tuesday, traders were saying a first rate cut in June was more likely than not; by Thursday the forecast was 90% no change. In fact, only one full cut is priced in by the end of the year, and could come as late as November, adding to the tough economic in-tray facing whoever next occupies No 10.
