It’s decision time: Elections

It’s getting close to decision time on both sides of the Channel with the French Parliamentary elections due on 30 June and 7 July and the UK General Election on 4 July.

In the UK, the Conservatives are set for a truly historic loss according to Bloomberg’s poll of polls, showing the Conservatives on 20.9% and Labour on 42.2% with Reform at 14.9% and the Liberal Democrats at 10.8%.

Meanwhile, a constituency-level poll by Savanta for The Telegraph has predicted Rishi Sunak is set to become the first sitting Prime Minister ever to lose their seat at a general election. The Savanta survey forecasts the Tories will be reduced to a rump of 53 MPs, only beating the Liberal Democrats to become the official opposition by a handful of seats. Sir Keir Starmer and Labour would be on track for 516 seats, taking up four in five seats in the Commons and winning a majority double that secured by Sir Tony Blair in 1997.

However, two other seat-by-seat polls yesterday painted a more optimistic picture, with one suggesting the Tories could retain as many as 155 seats. But that would still mean a 1997-seat wipeout.

Sunak’s UK election stirs political and financial circles

Currency Exchange Rates Update: Pound, Euro. US Dollar

The Pound hit a 22-month high against the Euro on 14 June before dropping back by just over 0.6% by the end of last week.

Against the US Dollar, the Pound fell from a 2-month high on 12 June to finish last week at a 5-week low.

Against the Australian Dollar, the Pound is also trading at a 5-week low.

What’s in the news? UK

UK: Economy

What would an incoming Labour Government for the first time for 15 years with a large majority and untested leaders mean for the UK economy and the Pound Sterling?

Conventional economic ‘wisdom’ would suggest good for banks, construction and supermarkets with a likely pro-growth Labour agenda and providing Rachel Reeves is trusted to be fiscally prudent, the Pound could strengthen against its major currency peers, especially if the French parliamentary elections go in favour of RN, Marine Le Pen’s party and with President Biden still well behind in the polls, especially in the key swing states against former President Trump.

The Guardian is reporting that the Labour party is ‘drawing up plans for £10bn of extra wealth taxes’ with increases to capital gains tax and the reform of inheritance tax to make it more difficult to pass on farmland tax free.

Sir Keir Starmer has regularly insisted that Labour will not raise taxes on “working people”, listing income tax, National Insurance and VAT. However, as he himself defines “working people” as those “who earn their living, rely on our public services and have no savings” its not too difficult to ‘join the dots’.

Away from the UK General Election, the Bank of England (BoE) voted to leave interest rates on hold for a seventh consecutive meeting last week, but an August rate cut is still on the cards.

Good news: BoE, UK Inflation, UBS

The BoE decision came just a day after new figures showed that inflation fell to 2% in May, its lowest level since July 2021 and down from a peak of 11.1% in October 2022, the highest in 41 years.

UK inflation is now the second lowest in the G7.

Investment bank Panmure Gordon reckons that the UK’s annual inflation rate will undershoot the G20 average for “a sustained period”, with thus-far “sticky” wage and services inflation falling into line.

The Lloyds Sector Tracker for May indicates a broader base for UK economic expansion with eleven of the fourteen sectors reporting growth, an increase of three from April. Similarly, nine sectors reported rises in both output and new orders, the joint highest count since April 2022. These Lloyds sector-level insights show growth wasn’t just concentrated in just one or two particularly fast-growing sectors.

The giant Swiss banking group UBS is forecasting that the UK could become “an island of stability” in financial markets.

Not so good news: UK Government Borrowing

The Office for National Statistics (ONS) reports that the UK’s debt has soared to £2.7 trillion, its highest level since 1961 and virtually equalling UK GDP, the size of the entire economy.

UK Government borrowing increased compared with the same month a year ago as a rise in tax receipts was outstripped by a steeper increase in benefit payments of £2.2bn. The UK now spends just over £25bn per month on welfare.

Thomas Pugh, economist at RSM UK, said “Given that the current tax and spending plans look extremely difficult to fulfil, the new government is going to have to raise more in taxes, or borrow more. Simply keeping non-protected departments’ budgets stable in real terms will add an extra £20bn to government spending. With both main parties having ruled out tax raises to the three main revenue raisers, income tax, National Insurance and VAT, and having signed up to similar fiscal rules, the next government has a very tough balancing act to perform to avoid another dose of austerity for already stretched government departments.”

Stronger economic growth would help by bringing in more tax receipts, but the S&P Global purchasing managers’ index (PMI) shows growth slowed this month from a figure of 53 in May to 51.7 in June. Any score above 50 indicates growth, so this score shows a slowdown in private sector activity.

Manufacturing and construction companies reported strengthening demand, but this was more than outweighed by a slowdown in the services sector.

The Henley Private Wealth Migration Report, authored by migration advisory Henley & Partners reports the UK is on track to lose 9,500 millionaires this year, more than any country in the world except China. It’s more than double the number that left the country in 2023.

The general election is expected to further exacerbate the exodus. Whilst the Labour party has positioned itself as a pro-business party with a focus on wealth creation, its election manifesto is also clear that it plans to target loopholes benefitting the wealthy.

The number of millionaires in the UK has fallen 8% over the past decade, according to Henley, in stark contrast to most other major economies. The number of high-net-worth individuals in Germany, for example, has risen 15% over the period, while the number in the US jumped 62%.

The ONS reports the London economy is dragging down the UK’s productivity growth as office staff continue to work from home. Productivity in the capital tumbled in 2022 taking output per hour worked to its lowest level since 2009. London’s productivity dropped by 2.7% between 2019 and 2022 with Wales the only other region to fall. The strongest growth came in the Northwest of England, where productivity jumped by 7.9% over the same period.

HSBC has warned that Labour’s proposals to introduce a “genuine living wage” risk triggering a surge in unemployment and pushing up mortgage costs for households by increasing costs for businesses.

USA: Fed

The Federal Reserve (Fed) held interest rates for the seventh consecutive meeting after ‘modest’ progress on inflation but surprised the markets with projections showing that policymakers expect to cut interest rates only once in 2024, down from three back in March.

The Fed said that there has only been “modest further progress” towards the 2% target, cautioning that inflation “remains elevated”.

The decision to hold rates came just hours after official data showed US inflation fell faster than expected in May.

Goldman Sachs economists say the US labour market stands at an “inflection point” where any further softness in demand for workers will hit jobs, not just job openings.

Pacific Investment Management warned more US regional bank failures could be on the way thanks to a “very high” concentration of troubled commercial real estate loans on their books.

The EU: France, Italy. Spain, Greece, Portugal & RN

France and Italy were reprimanded by the EU (European Union) for running budget deficits above the 3% limit, leaving them subject to the so-called Excessive Deficit Procedure, which requires remedial action and can lead to fines for noncompliance. The announcement is even more consequential with the French parliamentary elections due on 30 June and 7 July. The yield spread (cost of borrowing) between France and Germany has already widened to multi-year highs above 78 basis points, and France’s Finance Ministry estimates that if such a higher borrowing cost persisted for a year, it would set the state back around an additional €800 million.

If the Rassemblement National (RN), led by Marine Le Pen wins the parliamentary elections, Macron could be a lame duck president, forced to work with a prime minister from a completely different party.

2024, An Election Year

Goldman Sachs has warned that a RN election victory could trigger a surge in France’s debt to a post-war high and further hit the French stock markets. Paris’s CAC 40 index last week recorded its worst performance since March 2022. The French stock market is now collectively worth $3.13 trillion (£2.47 trillion), behind the UK’s $3.18 trillion according to data compiled by Bloomberg.

The Euro Stoxx 50 volatility index continues to climb, rising to over a 7-month high.

France has a very high level of indebtedness (110% of GDP) only behind Greece and Italy in the EU. French corporate debt is high too.

France does not have its own central bank. Like all the other euro-zone nations, it falls under the auspices of the European Central Bank (ECB) adding a political dimension that you don’t have with a national central bank.

The ECB thanks mostly to former boss Mario Draghi now has the power to do the same sorts of things that the Fed or the BoE can do in emergencies, but it raises this question. If a country has a government which the ECB is wary of, then will they really step in to bail it out? Particularly if that requires expending political capital to get the move past other, more fiscally careful nations.

Spain, Greece, and Portugal are now among the fastest-growing nations in the euro zone.

Others: China & South Africa.

The housing slump in China deepened in May, triggering new calls for government aid. Declines in real estate investment and home prices gathered pace, while industrial production growth fell short of expectations. That rippled through commodity markets, with iron ore futures sinking and copper prices hitting an eight-week low. The Chinese central bank, meanwhile, left rates unchanged for the tenth month in a row.

China’s National Bureau of Statistics reported a modest 5.6% year-on-year increase in industrial production, a drop from April’s 6.7% and below the 6% forecast by economists.

A measure of foreign direct investment in China declined for the 12th straight month. Inbound FDI in China dropped 28.2% in the first five months of 2024 from the same period last year. The figure was worse than the 27.9% drop in April and extended a streak since June 2023.

South Africa’s political leaders agreed to a broad alliance to form the next government and back the re-election of Cyril Ramaphosa as president after the African National Congress lost its outright majority. The alliance would be led by the ANC and the business-friendly Democratic Alliance, a pairing that pushed the rand and the nation’s stocks higher.

And finally, is anyone in the market for a new car?

Ferrari is preparing to launch its first electric car with a price tag of more than €500,000.


“History never repeats itself. Man, always does.”

By Voltaire, the French Enlightenment writer, philosopher, satirist, and historian.

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