What does Labour’s rise to power mean for the British economy?

The British Labour Party won the House of Commons elections by a landslide, ending a 14-year reign of its rival, the Conservative Party, at the head of both the legislative and executive branches.

As a moderate left-wing party, Labour has an economic agenda that is completely different from the Conservatives’ approach at a time when the UK is suffering from several problems, most notably high inflation, weak economic performance especially in the post-pandemic era, increasing migration flows, a stagnant housing market and the high cost of buying homes for citizens.

During its election campaign, the Labor Party, led by incoming Prime Minister Keir Strummer, pledged to raise taxes on private equity fund managers’ compensation, which caught the attention of markets and raised questions about the potential impact of the party’s economic policies.

Goldman Sachs raised its forecast for UK GDP growth in 2025 and 2026 by 0.1%, as expected reforms to the building planning system will boost housebuilding activity and productivity, and higher public investment can help lift underlying economic output.

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In his final speech as UK Prime Minister today, Rishi Swannack highlighted the improvements in the country’s economy during his tenure, and said he had made it his top priority to stabilise the economy when he took office.

He added that inflation had returned to the target level of 2% under his tenure, mortgage interest rates had fallen, the economy had turned to growth, and that the country was safer and stronger than it was 20 months ago when he took office.

What does Labour’s rise to power mean for the British economy?

Potential impacts on the real estate sector

Labour’s election campaign pledged to build 1.5 million new homes, and achieve the biggest increase in low-cost social housing in a generation.

Analysts said Investec Housebuilders are expected to benefit from sector-supporting schemes as much of the political constraints around urban planning fade away.

They added that even if no new measures are taken to support the sector on the demand side, the expected interest rate cuts are expected to contribute to a decline in the cost of homes.

Hargreaves Lansdown said in a note that shares in some housebuilders could rise on the back of Labour’s low-cost housing policies.

stock market reaction

– A number of experts believe that the stock market will probably not move as a result of the Labor Party winning a parliamentary majority, and James McManus, head of investment at Natomig, explained that British markets do not usually care about election results.

He said that previous data shows that financial markets rarely move when election results are in line with expectations, as was the case with the last election.

Susannah Streeter, Head of Finance and Markets at HSBC, agreed.Hargreaves agreed with McManus’ analysis, but noted that there could be some exceptions this time.

– Some sectors, and perhaps stocks of certain companies, are likely to be affected, as the utilities sector may face increased pressure due to the party’s plans to increase fines imposed on water companies that are already suffering under the burden of rising costs.

– While airline stocks may benefit from the party’s pledge to increase the defense budget, and spending on technology and equipment.

Sterling pound

Investors expect the pound to be unaffected either in the short term by the outcome of the vote, or in the long term by Labour Party policies that will not pose a significant risk to its value.

Deutsche Bank analysts and economists explained in a note that investors will focus on the results of the French elections, the second round of which is scheduled to start next Sunday, then the British economic data expected in the middle of the month to see whether the Bank of England will start cutting interest rates by the August meeting or not.

– Francesco Bisol, FX strategist at ING, said the British currency is expected to weaken over the next 24 months in light of his expectations that the Bank of England will cut interest rates by a greater degree than the European Central Bank.

– This is in addition to the possibility of higher taxes in the United Kingdom, but he said that these changes would have happened sooner or later regardless of the election outcome.

Economic growth

– “Bisol” explained that the risks of the British government overspending are very small, and that the possible return to negotiations to exit the European Union would have a positive impact on economic growth.

Goldman Sachs said that the potential trade rapprochement between the UK and the EU would offset some of the negative effects of the Brexit decision.

Regarding the party’s tax policy, he said that a potential expansion in collections could reduce the incentive to invest, while its pledge to reduce immigration could weigh on the labor supply.

But the bank stressed the difficulty of predicting the potential economic impacts of the party’s policies in light of the absence of details of its plans at the present time.

Bond market

– Rachel Reeves, Labour’s economic spokeswoman during the election campaign, proposed changes to the rules governing government borrowing in order to boost economic growth and investment.

But the bond market’s focus appears to be elsewhere, says Susannah Streeter of Hargreaves, as bond market investors are more sensitive to expectations about interest rates than to governments’ future investment plans.

Source: CNBC

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