Austerity

Britain, Cameron See a Glimmer of Economic Hope


U.K. Prime Minister David Cameron speaks during the G8 social impact investment forum at Bloomberg's offices in London on June 6

Photograph by Chris Ratcliffe/Bloomberg

U.K. Prime Minister David Cameron speaks during the G8 social impact investment forum at Bloomberg's offices in London on June 6

British Prime Minister David Cameron trails in the polls, has fallen behind on his deficit reduction program, and been undermined by rebellious lawmakers. Even so, his Conservative Party can find cause for optimism. The economy shows signs of returning to growth, and the opposition Labour Party is embroiled in a dispute about its ties with its union backers. Yields on 10-year gilts—British sovereign bonds—are trading at less than 1 percentage point above record lows, allowing Cameron to argue that investors support his strategy.

The austerity imposed by Cameron and Chancellor of the Exchequer George Osborne is unpopular, “but people don’t see any alternative, either to the policy or to the government,” says Anthony Wells of polling company YouGov. The Conservatives are about 8 percentage points behind Labour, the average spread when all opinion polls are considered. “After slashing spending, raising taxes, freezing wages, I’d expect things to be a lot worse for them,” says Wells.

This gives Cameron a basis on which to build as he prepares for the May 2015 general election. One person inside Labour leader Ed Miliband’s office, speaking on condition of anonymity, says that Labour’s view is that it needs to be 15 percentage points ahead in the polls as the vote approaches. The aide says a 10-point lead could well disappear during the campaign.

Recent data suggest Britain’s economic recovery is gaining momentum after a return to growth in the first quarter. House prices are rising, and the National Institute of Economic and Social Research, whose clients include the Bank of England and the Treasury, said on July 9 that gross domestic product rose 0.6 percent in the second quarter. The International Monetary Fund has raised its 2013 growth forecast for the U.K. to 0.9 percent from 0.6 percent and predicts expansion of 1.5 percent next year.

“The government wants to go into the election against a rosy economic background,” says Ian Kernohan, an economist at Royal London Asset Management in London. “Every time there’s been a GDP downgrade, the cry has gone up, but now they can say, ‘Well, actually things aren’t as bad as people said,’ and say, ‘Our plan is working.’ ”

Government initiatives to unblock mortgage lending are starting to spur demand for homes. Acadametrics, a London-based housing-market analyst, reports that the average price of a home rose to a record £232,801 ($427,000) in June. That’s giving a boost to consumer confidence in a country where two-thirds of households own their own homes.

Still, Chancellor Osborne said on July 11 that the recession in the euro area, which buys 44 percent of British exports, poses a risk to the U.K., and growth is still “very dependent” on monetary stimulus by the Bank of England. Manufacturing shrank unexpectedly in May, a government report showed last week. Living standards remain under pressure from stagnant incomes and accelerating inflation.

The economy’s 0.3 percent growth in the first quarter was due partly to consumers saving less, underscored by a drop in the savings rate to 4.2 percent, the lowest in four years, says the Office for National Statistics. “We are increasingly winning the economic argument,” Osborne said. But “caution and no complacency are very much watchwords for government at the moment.”

On the political front, the violent protests that followed a vote to boost university tuition fees in 2010 haven’t been repeated, even as public-sector pay increases were limited to 1 percent and welfare payments were squeezed. The government’s decision to cap the welfare support a family can receive at £26,000 a year is “overwhelmingly popular,” says Wells. A YouGov poll in January found that 72 percent of respondents supported a limit on benefit payments to families on the dole.

Cameron benefits from one advantage of incumbency: He’s able to set the basis for debate. While Labour has opposed many individual spending cuts, it has had to accept that it cannot pledge to reverse them all should it win in 2015. Similarly, while Cameron’s decision in January to promise a referendum on European Union membership may have been driven by the euro-skepticism of his party, it has increased pressure on Labour leader Miliband. Some Labour supporters argue the party can’t go into the election rejecting a plebiscite with polls showing almost half of Britons in favor of leaving the EU.

A YouGov poll conducted July 9-10 put Conservative support at 32 percent, vs. 37 percent for Labour, narrower than the average number from other pollsters. Similar polls at the start of the year put Labour more than 10 percentage points ahead. YouGov found 47 percent of respondents saying Miliband was a weak Labour leader. “Miliband’s ratings are awful,” Wells says. “If there was a Labour leader who looked like he could be prime minister, things would be a lot harder for the Tories.”

The bottom line: Britain’s economy will grow 1.5 percent next year—a mediocre number that improves on 2013’s 0.9 percent.

Hutton is a reporter for Bloomberg News in London.
O'Donnell is a reporter for Bloomberg News in London.

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