The winds of change

In the latest of her appearances on SiriusXM's The Business Briefing programme, London Business School’s Linda Yueh discussed the UK economy and the snap elections in both the UK and France.

For those unfamiliar with the UK political scene, Dr Yueh explained how a government could be formed so quickly following the decision by the Conservative Party leader, Rishi Sunak, to hold a snap election.

In contrast to the UK, the US political opposition does not establish a shadow government. In the UK, the major opposition parties have a shadow cabinet in place, and have their counterparts in opposition in the form of the key cabinet roles such as, for example, the Chancellor of the Exchequer, Secretary of State for the Home Department and the Secretary of State for Foreign, Commonwealth and Development Affairs.

The Labour opposition has therefore been exercised in the specific issues confronting the incumbent government for the period they have been in opposition. Therefore, voters do know who these key people are, and while there are reshuffles that take place, for the most part these main figures are already in place.

Dr Yueh made the point that this election is an important event, with the prospect of a change in the Conservative-led government for the first time in 14 years, with the Labour opposition likely to form a government, while benefitting from a significant majority.

In terms of the UK economy, Dr Yueh said that it was a significant time to take the reins of the UK economy.

The two major parties – Conservative and Labour – are not significantly different in the sense that both parties are centrist and both share ambitions for growth, to build more homes and increase standards of living.

The one area of principal difference lies with the Labour party – “and the key is in the name” – in that Labour has its roots in trade unionism, has ambitions to end zero hours contracts and develop more better paid employment opportunities. Labour has pledged not to increase income tax, national insurance or VAT, and this means that it will be hard for them to “balance the books” over the course of the next parliament.

If Labour is not going to raise taxes, then, Dr Yueh said, it will be subject to the same constraints as the previous government, challenged by slow growth, and a large budget deficit.

The approach by both parties is, to borrow a phrase, one of “keeping one’s powder dry” in terms of not offering up too much detail on how these challenges will be addressed. This cautious approach is common to both parties said Dr Yueh.

In terms of the UK economy, Dr Yueh that the challenges of disentangling regulation from the EU since the UK left the European Union, and the effects of years of austerity since the banking crisis, presents a challenging environment for any new government.

There has also been a steady departure of companies from the London Stock Exchange. A number of companies that had previously dual listed in Europe and the UK, and in the US and UK, now have delisted from the London Stock Exchange. This, combined with slow growth and poor productivity, and suffering from higher inflation than other major economies, has produced an uncertain and challenging environment for business investment and growth in the UK.

These issues, said Dr Yueh, are not a direct cause, although there is some correlation with why one sees the FTSE 100 “not quite stagnating but coming pretty close to it”, with companies delisted from the UK because of “low liquidity and economic uncertainty”.

This environment has negatively impacted perceptions abroad, although, says Dr Yueh, “the reality is not quite so dramatic; but perceptions do matter”.

To illustrate how perceptions can vary and change, dramatically and quickly, Dr Yueh observed that there was a negative impact on the French economy caused by the French election.

With French President Emmanuel Macron calling a snap election there has, says Dr Yueh, been some “spooking of the markets” because of the prospect of France’s far right’s plans for big-spending, populist initiatives.

In the UK, Dr Yueh reinforced the point that perceptions do matter and, in the UK, with a new government soon to come to power, there needs to be a tighter focus on achieving growth, encouraging investment, supporting tech companies, and encouraging and supporting the energy transition.

“There needs to be a strong strategic plan to reduce uncertainty and achieve growth in these key areas of the economy.”

This broadcast was made in June 2024. Since then a new Labour government has been elected in the United Kingdom, with Sir Kier Starmer appointed as the country’s Prime Minister.