Markets liked the election result – maybe the economy really is going to get better

Make no mistake, the markets liked the UK election result. That might seem perverse: after all, there will be a Labour government, traditionally no friend of big business and profit-seeking capitalists, with a thumping majority. If there was a case for a crashing pound, it was surely this.

Not a bit of it. On the release of the exit poll correctly predicting the result, sterling held firm. It was broadly unchanged against the dollar and the euro. Nor is anyone predicting a collapsing stock market. Bonds, too, are steady.

In a word, investors are relieved. Even the size of the Labour victory has helped in that regard. A much closer outcome that may only have led to a further ballot and political turmoil, would have created market volatility.

As it is, the scale of Sir Keir Starmer’s triumph has provided certainty. In a world of upheaval, of wars, natural disasters brought on by climate change, the resurgence of the far right in France and Europe, a US election that is too close to call, that may yet see a change in candidate and could provoke civil discord, the UK has emerged as a beacon of calm.

It’s not a source of worry any more. Rather, Britain has become a magnet for those looking for a safe haven for their money.

The pound is back to where it was in 2016, when Britain voted to leave the EU. That’s a reflection of traders and investors believing the rollercoaster since, as prime ministers have been and gone, is over.

Ironically, the weak state of the public finances helps; a feeling persists that Starmer is not going to do anything fiscally in a hurry. His hands are tied, but he is unlikely to force through dramatic personal or corporate tax increases. That’s what he and new chancellor Rachel Reeves have been promising the City over copious cups of tea and sandwiches.

Theirs is not going to be a return to the horror of Liz Truss’s brief administration. The bond markets can relax: Starmer and Reeves insist everything they do will be properly funded.

That mood, exemplified in the quiet character of Starmer himself, accompanied by interest rate cuts as inflation descends, should support solid economic growth over the next 12 months.

While it is not the same feeling as in 1997 when Britain elected a young, charismatic premier, analysts are talking about a rerun. “The UK’s economic backdrop is suggesting this could be 1997 again,” says Michael Browne, chief investment officer at Martin Currie. Real wage growth and full employment has overturned a negative outlook. The UK economy is on a growth path. He adds: “Sterling’s increasing strength is potentially a once-in a-generation event. We’ve been here before, in 1997 when a currency strength and falling gilt yield supported a positive outlook for UK equities.”

Rishi Sunak may have taken a pasting at the polls but, perversely, he bequeaths an economy that has recovered more strongly from Covid than any in Europe. Britain is the only European nation where the forecasts in services, manufacturing and construction are entirely upbeat.

Matt Burkitt of Dimension Technologies, a predictive analytics firm that builds forecasting and risk management products, points out that the last Labour government, from 1997 to 2010, actually cut taxes. “There was relatively little increase in national debt, especially on an inflation-adjusted basis,” he says. “The Tories squandered national finances far faster and harder.”

Burkitt concentrates on the number of business start-ups. “Frankly, growth, with or without Brexit, is all about small business – a three-person firm can more easily double headcount and low revenues than a giant corporate,” he adds. “So, we should ignore the FTSE, gilts and focus on how our small firms are affected by the likes of Brexit and government actions. If you want to take the real pulse of entrepreneurial activity and the engine of future growth, look at domestic small and mid-cap equities. They did absolutely fine under Labour and the Conservatives alike.” And they’re well poised today to benefit from the uptick in UK economic activity.

Once Labour is bedded in and Britain enters a period of economic stability, what then?

At some stage, later in the year, Starmer will flex his muscles; after all, he was elected to begin change. That is likely to be expressed cautiously. We can expect some rebalancing of taxes, with the imposition of windfall taxes on energy and utility companies and VAT on private schools.

Those are expected and they are unlikely to scare international investors. They will not provoke a popular backlash – consumers regard the profits-greedy and sewage-spewing energy and utility providers as long overdue for targeting. Similarly, school fees affect only a small proportion of the population, and the moral case for VAT being charged on a sector that cannot pretend to be charitable, is a strong one.

Crucially, if he is true to his word, Starmer will maintain his stance of fiscal neutrality which will continue to reassure the bond markets. He is not going to play fast and loose with the public purse and people’s wallets.

Solid growth is the expectation. Between 2010 and 2019, average growth was 2 per cent. That’s probably where it will be, certainly until energy prices stabilise and decrease. Cheaper fuel, lower interest rates – these should come on stream in 2025. Sterling is in a good place, and the UK is poised to take advantage, especially now that France is on the precipice.

It was the Labour song from 1997 and it was repeated via a protester armed with a loudspeaker during Sunak’s election announcement: “Things can only get better.” Barring some unforeseen event, that promise may be about to come good.