Can the economy rescue Britain’s Conservatives?

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Britain’s governing Conservatives are pinning their hopes on an improving UK economy as a way of restoring support ahead of the election expected this year — despite polling showing that voters link them with the country’s lingering cost of living crisis.

The Tories’ pitch will be that the country has — in Prime Minister Rishi Sunak’s words — “really turned the corner”, as Downing Street focuses on surveys pointing to higher consumer confidence and an end to last year’s technical recession.

But analysts say there is little sign that voters are ready to give Sunak credit for the improvement, as memories of the market crisis triggered by his predecessor Liz Truss hang heavily over the electorate.

While voters have become somewhat less pessimistic, this is not feeding through to “voting intentions”, said Gideon Skinner, research director at polling company Ipsos. “Many people are still clearly worried about the economy,” he added.

One senior Tory said Sunak had little choice but to focus on the economy, adding that the party had “basically given up on governing”.

“Inside Number 10 and the election campaign, the economic backdrop is seen as very important. The thinking is, if people feel better off, they’ll be more predisposed to the Conservatives. The argument will be: ‘things are improving, don’t let Labour ruin it’,” the Tory said.

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The problem is that even though the UK is on track to exit the shallow technical recession of the third and fourth quarters of 2023, growth is on a decidedly tepid trajectory. Gross domestic product will rise by just 0.8 per cent this year — and per head it will fall by 0.1 per cent, according to the Office for Budget Responsibility, the fiscal watchdog. Real household disposable income will not regain its pre-pandemic peak until 2025-26.

Sunak has set great store by his five pledges, first announced more than a year ago, which suggested he would halve inflation, grow the economy, get debt falling, cut NHS waiting lists and stop small boats from crossing the English Channel.

Bar chart of Cumulative CPI inflation, selected items, Feb 2021 to Feb 2024 (%) showing UK inflation has fallen but price levels remain elevated

Three of them are related to the economy. The first was undermined because the UK slipped into recession in the second half of last year, but the prime minister claimed to deliver on inflation last year. The Bank of England forecasts headline price growth will be below the 2 per cent target in April.

Downing Street’s thinking is that by the time of an autumn election, voters will have enjoyed a sustained period of wages outpacing inflation, one or two interest rate cuts, and inflation back at target levels. There will also have been time for a significant rise in the national living wage to kick in, as well as the second cut to national insurance announced in March.

Line chart of UK real average earnings, excluding bonuses, latest three months vs same period a year earlier (%) showing Real wages are are no longer falling

“We really have turned the corner at the start of this year,” Sunak told a business audience in Coventry last month. “Inflation has been more than halved. Mortgage rates, energy bills falling, wages are rising, consumer confidence, business confidence increasing.”

But as President Joe Biden is discovering in the US, a stronger economy does not quickly douse memories of the worst price surge since the 1980s.

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Slower UK headline inflation was not feeding through to “general perceptions on the cost of living”, said Skinner. “People still see that prices are higher than they were a few years ago.”

There has been no discernible impact from improving consumer confidence metrics in the Conservative party’s polling figures.

The Tories hope their trump card will be the reduction of interest rates by the BoE from the current level of 5.25 per cent.

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But party insiders worry that tens of thousands of homeowners a month are still coming off fixed mortgage deals and facing higher repayments, for which many are likely to punish the Conservatives at the polls.

The party will argue that Covid-19 and Russia’s full-scale invasion of Ukraine, rather than Sunak’s government, are to blame for high interest rates. But support for the Conservatives among mortgage holders and renters is notably lower than among those who own their home outright.

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Lingering memories of Truss’s “mini” Budget of 2022, which triggered a surge in bond yields and mortgage rates as markets panicked as a result of unfunded tax cuts, are diminishing any sense of relief at the prospect of BoE rate cuts.

Polling by Ipsos shows that more than half of voters who think the economy is in a poor state specifically mention decisions made by Truss and her chancellor Kwasi Kwarteng. Brexit and policies of other Tory governments are also cited, just behind Covid-19.

Jack Bailey, a political scientist at the University of Manchester, said the Truss episode would have a lasting impact similar to the crisis in 1992 over the UK’s ejection from the Exchange Rate Mechanism. The “mini” Budget had “destroyed” the Conservatives’ reputation for sound economic stewardship, he said, “and it takes a lot of time to get that back”.

Labour is only too happy to embrace that narrative. Claims that the Conservatives have “crashed the economy” will be at the heart of Sir Keir Starmer’s campaign, while his party will argue its plans to “get Britain building again” will boost industry and create new jobs.

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Tory officials acknowledge their only real alternative campaigning option is to fight the election on immigration, which could include a pledge to renegotiate or quit the European Convention on Human Rights if the associated Strasbourg court seeks to block flights removing asylum seekers to Rwanda.

The government’s flagship bill underpinning the policy is expected to pass into law later this month, which means the reaction of international judges could be put to the test within weeks.

Government officials deny the charge that the administration has run out of steam, and insist it has a busy agenda, which includes pressing ahead with moves to tackle migration and crime.

University of Manchester’s Bailey said there remained a “general malaise” about the economy among voters, driven in part by the fact that lower inflation had not erased the impact of the surge in the cost of living that began in 2021.

But he acknowledged that Sunak had little choice but to campaign on the improvement in economic fundamentals. “I’m not sure what else they have left,” he said.

Via

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