A sideways look at economics

The second team at a village cricket club recently reached a score of 201/2 after 28 overs in a 45 over match – a commanding position, looking to push on to 350 or even 400 from there. They finally reached 206 all out, and lost the match. This club, unfortunately, has experienced collapses like that many times. They are part of the club’s folklore.

Conservative Party folklore revolves around a self-perception as a disciplined, highly efficient election-winning machine. It has never seen its poll lead collapse so far in such a small span of time ahead of an election – from a lead of 20 percentage points or more only 7 weeks ago, to a lead of only 2 percentage points in the popular vote yesterday, delivering a hung parliament. The cliché goes: oppositions don’t win elections; governments lose them. This government did not lose, but it came extremely close, from an extremely comfortable starting position. That has to rank as an epic fail on the part of the Conservative campaign.

The defensive line from Conservative HQ is that their share of the vote increased relative to the last election albeit by less than did Labour’s share, and that it is higher than in any election since 1983. However, both parties benefited from the collapse in the vote for the single-issue party UKIP (who have got their way with the result of the EU referendum and are now redundant) and the big reduction in support for the SNP, which was so strong last time around that the only way for them was down. And the fact remains that a commanding poll lead collapsed to almost nothing in a few weeks.

UKIP and the SNP were expected to suffer, and they did. But the centrist party, the Liberal Democrats, were expected to benefit, and they did not – gaining only four seats, and seeing their share of the popular vote fall compared to their disastrous campaign of 2015. They campaigned hard on the issue of Brexit, calling for a second referendum, in the hope of enlisting the support of disappointed remainers. That support was not forthcoming. This was an epic fail not just for the Tories but also for the Liberal Democrats, a party overloaded with bad feeling after their role in the Coalition.

It’s not just the Liberal Democrats. Labour, the big winners of the campaign, increased their support enormously by positioning themselves further from the centre than any left-of-centre party since 1983 at least. And, except for the issue of Brexit, the Conservative campaign was broadly centrist. It failed.

The centre is missing.

To quote further from Talking Heads’ doom-laden song “The Overload”, this election was:

A terrible signal

Too weak to even recognise

A gentle collapsing

The removal of the insides

It should have come as no surprise. Indeed, the co-author of this piece won Fathom’s election sweepstake by calling the number of Conservative seats within three.

As our regular readers will be aware, we were of the opinion that the outlook for the UK was dire even before last June’s decision to leave the European Union. Today’s election result only adds to those woes. The macroeconomic forces that have undermined the centre in many countries (with the notable exception of France) remain in place. These are the forces that led to the UK’s unexpected decision to leave the European Union and toppled David Cameron. They have now taken their latest victims.

The UK has accumulated a huge overload of public and private debt, which is undermining growth and driving rising inequality in terms of wealth. Whoever is in charge of managing the economy henceforth faces a long-term outlook that is unprecedentedly bleak. That outlook has not changed materially as a result of the election. It does not change the likely shape of Brexit (only a big Liberal Democrat resurgence, with that party holding the balance of power, would have done that). And it does not change the likely stance of macroeconomic policy materially either – only a Labour or Labour/SNP government would have done that. It has weakened the Prime Minister’s hand in negotiations with the EU, and indeed in terms of achieving anything at all domestically. Another election is likely in due course, perhaps after a couple of by-elections. The net effect of all this is increased uncertainty. At the time of writing, we expect a Conservative/Democratic Unionist Party-led government, which will secure a tiny majority — rendering both the period and magnitude of EU-related uncertainty even greater. All of this will weigh on an already troubled economy.

And the clock is ticking. It is less than two weeks before Brexit negotiations are due to begin in earnest, and the UK finds itself with a lame duck Prime Minister lacking a clear mandate of any sort.

Recognising that the odds were turning in favour of Labour, we explored what this might mean in a Newsletter sent to our clients last week. We gave “No clear result” a growing probability of 35%, and suggested that it would see both sterling and Theresa May fall. While the status of the latter remains unknown for now, cable has dropped 1.4% at the time of writing in response to the news. In our view, with markets unduly optimistic about the prospect of a Tory-led coalition, sterling is vulnerable to a further sell-off.

The big question for economic policy in the longer term is how to deal with the overload of debt. Any attempt to answer that question has now been delayed even further. The UK economy will stumble on, weighed down by debt, saddled with uncertainty, until the next election at least.

We travel on the quiet road

The overload