What impact will a hung parliament have on the economy?
Current Affairs

What does the election result mean for the UK economy?

Although the polls had narrowed significantly in the build-up to Election Day on Thursday 8th June, many were in shock when exit poll results that evening suggested a hung parliament was on the cards. Markets and the pound sterling responded instantly, and when the final results the next morning confirmed that there would be no majority government, a whole new raft of uncertainties gripped a UK economy already heading into uncharted waters.

The days since have done little to clarify all these unanswered questions, and although the DUP will ostensibly allow the Conservatives to govern with sufficient authority, there is no doubt that the political landscape is a febrile, unstable one, which invariably has wider economic ramifications.

How has sterling responded?

The pound fell in the immediate aftermath of the exit polls, although it has stabilised somewhat since. When Theresa May called the election in April, sterling had initially responded strongly, with the anticipation being that her majority would increase. Currency markets are among the most volatile, and the outlook for the pound will hinge on numerous other factors, which we go into further detail on below.

Inflation and interest rates

Inflationary pressures on our import-heavy economy have been significant given the depreciation of the pound over the past 12 months, and an ONS report released earlier this week showed that inflation for the month of May exceeded expectations to reach new highs of 2.9 per cent. The impact on savers is thus a negative one, although increasing inflation would usually give cause for optimism that a Bank of England rate increase could be hastened. However, the uncertainty of a hung parliament may render this unlikely in the near future, albeit that there were three votes in favour of a hike at this week’s Monetary Policy Committee meeting.

That said, inflation is by no means all bad. Those with money in equities will likely benefit from a boost (the FTSE 100 continues to climb). Also, inflation, and the idea that something will be more expensive in the future, encourages a ‘buy now’ approach at consumer level, which should help to maintain economic momentum. Additionally, the fact that unemployment levels have dropped to new record lows will counter the impact of inflation.

Looser fiscal policy?

There is a limit to what power the Bank of England can wield, and many argue that fiscal policy may be better placed to cushion the economic uncertainties of the Election result. Certainly austerity has been a stick with which opposition parties have beaten the government with, and signs are that there will now be some loosening of the purse strings. Investment in public services should have positive knock-on effects on things like employment, GDP and tax revenues, while it could also leave the Bank of England better placed to increase rates.

However, the flipside of the argument is that, with the UK approaching full employment, the wider macroeconomic benefits of fiscal expansion may be reduced, not to mention inflationary. In addition, the deficit and national debt remain profound problems for the UK to grapple with, and the unsustainability of increased borrowing may offset some of the investor confidence gained by government spending.

Where does it leave Brexit?

The so-called ‘Brexit Election’ did precious little to clarify the dominant issue of the decade. Given that the two main parties (who collectively won more than 82 per cent of the vote) both committed to leaving the single market, there seems little mandate for rowing back significantly on the Brexit vote. However, a number of leading politicians have called for a softer approach to negotiations with the EU, which could produce a favourable response from various economic indicators.

Ultimately, it is not the ‘hardness’ or ‘softness’ of the Brexit outcome which will shape the economy, but the success of it, and how smoothly our departure from the European Union is carried out. Predicting this would be a fool’s game. All we can safely say is that we are none the wiser as to what the future of Brexit Britain holds following the Election.

Peer-to-peer lending and alternative finance

We await with keen interest to see what impact, if any, this hung parliament has on Government’s approach to the fintech and peer-to-peer lending sectors. Certainly, the Labour, Coalition and Conservative parliaments prior to this one have all been favourable to alternative finance, and helped cultivate fertile ground for platforms such as Lending Works to flourish. Indeed, earlier this year Chancellor Philip Hammond spoke proudly of how the UK’s fintech sector will “lead the world” into the fourth industrial revolution, and conveyed optimism that the UK was well placed to consolidate its global competitive advantage.

Now, more than ever, the UK needs the agile, versatile and progressive industries within the fintech umbrella to flourish, so the hope will be that the new minority government will continue to do its bit to support them.

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Michael Todt

Mike joined Lending Works in early 2015 with a background in marketing and journalism. Having long held a passion for economics, he is now the chief contributor to the Lending Works blog, and regularly writes about all things peer-to-peer lending, fintech and personal finance.