Political deadlock ‘the biggest threat’ in UK

An indecisive result in the UK’s upcoming national election and weak wage growth present the biggest threats to the economic recovery, according to a Reuters poll of economists.

Voters go to the ballot boxes on May 7 and opinion polls predict it will be close. Most have shown the opposition Labour party either slightly ahead of, or neck-and-neck with Prime Minister David Cameron’s Conservatives.

But with a “hung parliament” in which no one party has enough seats to govern alone looking increasingly likely, 11 out of 27 economists said the outcome of the vote was the biggest risk to Britain’s economy — the largest grouping, followed by 10 who cited weak wage growth.

Ten out of 17 who answered an extra question said an outright victory for the Conservatives would be the best outcome for British economic growth.

Previous Reuters polls ahead of UK and US national elections show market economists usually predict right-leaning parties will be best for financial markets and economic growth.

“The basic problem that the Labour Party faces in this election is that it is seen by the electorate as being a less credible manager of the economy than the Conservatives,” said Brian Hilliard at Societe Generale.

However, if he wins, Mr Cameron has pledged to hold a referendum on whether the UK leaves the European Union. That, said many economists, would be the biggest risk to the economy if it were to happen.

Mr Hilliard said it would cut growth by 0.5% per year — a modest estimate compared with some. “The biggest adverse risk is that the Conservatives are able to lead a government that holds the promised referendum on UK exit from the EU.”

Median forecasts in the poll say Britain’s economy will grow 0.6% per quarter through to next March, virtually unchanged from a January poll.

Slightly fewer economists said the biggest threat to growth was a lack of wage growth, but the poll suggested it would outstrip inflation over the next 18 months. Inflation plummeted to a 14-year low of 0.5% in December.

As oil prices have done little to reverse their slide, the Bank of England has scant reason to raise interest rates from a record low anytime soon. Less than a third of the economists polled expect inflation to reach at least the bank’s 2% target before June 2016. Bank rate has sat at 0.5% for nearly six years, and the poll said it would be October at least before they start rising. Markets don’t have the first hike fully priced in for a year.

As repeatedly stressed by policymakers, any moves up will be gradual. By the end of this year, bank rate will be 0.75%, by end-December 2016 at 1.5%, and even as 2017 draws to a close it will only have risen to 2%, if the poll is correct.

Reuters