Leading Indicators | After the elections: plus ça change?
3 minutes to read
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Here we look at the leading indicators in the world of economics.
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FIRST STABILITY, THEN REFORM?
After the political excitement of recent days, those looking for a similar dynamism in financial markets would be disappointed: the FTSE 100 was flat, the FTSE 250 was up by a more encouraging 3%, and UK Gilt yields fell back to 4.14%, more or less where they had been a week earlier. Sterling strengthened marginally. All in all, minimal movements reflecting a largely predictable outcome.
For commercial real estate, therefore, the impact of the first few days of a new government has been less about financial markets and rather more in the form of a raft of post-election announcements: reform of the planning system, mandatory housing targets, the scrapping of the ban on on-shore wind power generation. These policies could take some time to implement, but have been welcomed by respective industry heads.
Policy announcements and clarifications appear likely to come thick and fast over the coming weeks, but – aside from excitement in the listed construction sector - the impact on commercial real estate will take time to establish.
UNLOCKING CAPEX
As the last votes were being counted on Friday morning, the release of the fortnightly business survey from the ONS would have garnered little attention. In fact, it focused on a key election issue: the lack of ‘capex’, or business investment, in the UK.
Of the almost 40,000 UK businesses surveyed, only 10% wanted to increase capex during the next three months, and only 11% wanted to do so to increase output. The biggest limiting factor was uncertainty about the economic outlook. These figures will need to improve if the UK is to achieve a higher growth trajectory, and a key question is whether greater certainty, or political stability alone, will be enough to entice businesses to invest more heavily in the UK.
The new government aims to sweeten the deal by boosting infrastructure investment. However, given manifesto pledges of prudence, and very tight public finances, this, in turn, will rely on greater buy-in from large investors such as pension and insurance funds.
TRADING PLACES?
It can be easy to dismiss the impact of politics on markets, but recent experiences in France highlight the consequences of uncertainty: the spread between French and German 10 year bond yield grew by 30bps at the point of peak French election fever, only to fall back as the challenge from the Marine Le Pen’s Rassemblement National declined.
There is a narrative emerging that asks whether the UK might be resuming a position as a relatively more centrist, stable, and dynamic market after a period during which that was in question.
It may be too early to stake that claim, but it is clear that those making real estate decisions of an international nature would be wise to take a renewed look at the UK.
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