The “Phoney war” is nearly over, are you ready for life after May 7th?

Politics has had a limited impact on economic prospects to date…

Hard though it sometimes is to believe given the full on media coverage, the General Election campaign is drawing to a close. The EY ITEM Club UK Spring forecast suggests the UK economy will weather the Election storm and GDP will grow by 2.8% this year, in line with last year’s upwards-revised figure. CPI inflation will average 0.1%, this year, effectively taking base rate increases off the agenda until next spring.

EY ITEM Club UK Spring forecast 2015 April 3

As the forecast states,

“There is a wide gulf between the Conservatives and Labour on vital economic issues like fiscal consolidation and the EU …. Although there have been surprisingly few jitters in the financial markets, business investment growth has already fallen back from the strong figures we saw last summer. The housing market has also slowed and construction output has been falling as projects are put on hold. However, barring major upsets in the election, favourable developments in commodity and export markets should outweigh the effect of political uncertainty. “

Businesses now need to ensure they are fully prepared to make the appropriate decisions once the General Election result is known.

…and it will be back to business on May 8th

Whatever the result of the election, the rebalancing of the global economy is set to continue. As EY’s recently published Capital Confidence Barometer demonstrated, corporate confidence in the global economy is high, and actually running ahead of confidence in domestic economic prospects in most major economies. The shifting global outlook is most noticeable in the Eurozone with the combination of lower oil prices, the impact of QE on the exchange rate and financing costs, an easier fiscal regime and a more stable banking sector making economic prospects brighter than for some time.

It is not just the Eurozone economy that is in better health. Sentiment in India has improved and the USA continues to grow, albeit at a slower pace than some forecasters expected. The results from the CCB are consistent with developments in M&A and equity markets, all of which indicate a rebalancing in corporate investment priorities and a pivot back to the developed markets. Only India and China of the emerging markets feature in the top 10 investment priorities amongst the 1,600 companies surveyed for the CCB. Now is the time to review your geographic portfolio.

It also seems clear that the election is unlikely to curb the growth in UK consumer spending. EY ITEM Club forecast that household disposable Income will grow by 3.7% in 2015, the fastest growth for over 20 years. This seems sure to translate into increased consumer spending in the UK economy. With good retail sales data and strong car purchases so far in 2015, it does appear that the consumer recovery is becoming increasingly robust. Businesses need to make sure that their plans are such as to allow them to capitalise on this spending and avoid missing out on the consumer revival.

EY ITEM Club note that business investment has eased since the rapid growth in 2014. This probably reflects both a loss of confidence in the pace of UK economic growth in late 2014 and concerns over the election result. However the EY ITEM Club forecast is positive about UK economic growth all the way through to 2018, with growth averaging just under 3% per year for the period. This is healthy growth and ought to create opportunities for business but exploiting this growth will most likely require investment. UK business needs to ensure it has the capacity to invest to capture the available returns in the growing UK economy.

Once the election result is known and the identity of the future government known, business must work through the implications of likely policy for the economy. The different plans for fiscal policy are an obvious area as could be the UK’s relationship with the EU. Moreover, whatever the composition of the new government, immigration policy is likely to impact business. Appropriate analysis and contingency planning is required to ensure there are no nasty shocks in future.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s