The financial industry and the UK election

May 2015  |  FEATURE  |  BANKING & FINANCE

Financier Worldwide Magazine

When the UK goes to the polls for the 2015 general election this month, the potential for future financial and economic instability is huge. Understandably, any major governmental election is likely to have a significant impact on the financial industry and the wider financial markets, but in many respects there is more at stake than normal on Thursday 7 May.

Indeed, there is a deepening sense of public cynicism around corporate Britain and the wider financial sector. Furthermore, there is a burgeoning disaffection among many in the UK who believe that the country, and the wider economic system, is failing ordinary working people.

Much of this debate in the UK has focused on the role of the government and its relationship with big business. There is a fairly substantial element within the UK electorate, on both ends of the spectrum, who wish that the government and its constituent regulatory bodies were stricter with corporations and the financial sector in general.

Despite scepticism surrounding the government’s approach to big business, the UK economy has performed admirably in recent years. While the eurozone has struggled with bailouts, falling or stagnant growth and record high levels of unemployment, the UK economy has improved markedly by comparison. According to data from the Office of National Statistics (ONS), the UK economy grew by 2.6 percent in 2014, its fastest rate of growth since 2007. The International Monetary Fund has predicted UK economic growth of 2.7 percent in 2015, whereas other analysts have suggested an expansion of around 3 percent. Unemployment has also continued to drop, falling by 102,000 to 1.86 million in the three months to January.

Although 2014 was a year of growth, the pace of that growth slowed considerably as the year progressed. GDP in the final quarter of the year grew at just 0.5 percent. Furthermore, the economy saw a 1.4 percent drop in business investment in late 2014, the biggest drop since mid-2009. The decline in business investment – not only in the UK, but globally – was inexorably linked to the halving of oil prices in the second half the year.

The oil industry’s struggles notwithstanding, one of the key drivers for the drop in business investment was the impending election. Should the UK return a hung parliament, as it did in 2010, the consequences for the financial sector would be substantial. According to the EY Item Club’s autumn forecast, the prospect of no clear winner in the general election has had a detrimental effect on the national economy since the second half of 2014. The Item Club predicted that business investment growth in 2015 will drop to just 5.8 percent this year, down from 9 percent in 2014.

The ascension of a number of fringe parties, such as the UK Independence Party, the Green Party and the Scottish National Party, has had a transformative effect on the UK political landscape. Arguably, the UK now has six or seven sizeable political parties, fragmenting both the right and left wings. This makes it unlikely that the election will produce a definitive, outright winner. The failure of either Labour or the Conservative party to secure a majority could give rise to a second election later in the year.

For some commentators, a successful Labour campaign could also be detrimental. Fears abound that a Labour government would turn its legislative attention toward the perceived excesses of the financial sector. Some see Labour as an ‘anti-business’ party, and with memories of the French election of socialist president Francois Hollande still fresh in the mind, many in the financial sector are keen to avoid a Labour victory.

The general election could also have a major impact on the future of the European Union. Prime minister David Cameron has stated that his party, if successful, will hold an in/out referendum on the UK’s membership of the EU early in the next parliament. A possible ‘Brexit’ from the EU would likely affect a number of industries, though the financial services sector, including banks, insurers and other financial institutions would be among the worst hit, according to the Open Europe think-tank.

The uncertainty of the next few months will provide opportunities for growth. The current low cost of borrowing and burgeoning levels of consumer confidence suggest there may be opportunities ahead.

The UK is at a crossroads. The dominance of the country’s two main political parties is being challenged. The prospect of two possible elections and a referendum on the UK’s place in the EU could keep politicians, the financial sector and investors sweating.

© Financier Worldwide

BY

Richard Summerfield