UK Election Primer

June 03, 2024

UK Election Primer

A UK general election will be held on July 4. Polling stations close at 10pm on the day of the election with exit polls results announced shortly after. In the meantime, political parties are expected to release their manifestos between June 5 and 16 while head-to-head debates between Rishi Sunak and Keir Starmer are scheduled for June 4 and 26.

The latest set of polls (here and here) suggest three realistic election outcomes:

(i) Labour wins outright majority. This is the most likely scenario at over 90% probability. To win an overall majority, a party must secure 326 seats out of 650. Labour's current lead of 21% translates to a median 388 seats or a 62 seats majority. The highest number of seats Labour could win is projected at 497. According to ElectoralCalculus a 5% lead in the polls would get a bare majority while 10% lead would be consistent with a comfortable majority.

Direct comparison of current polling results with what happened in past general elections is misleading in part because of new constituency boundaries. Nevertheless, as a rough guide, Labour’s lead under Tony Blair in 1997 was 13% which resulted in a massive 179 seats majority.

(ii) Labour wins the most seats, but not a majority. Odds this scenario pans out is low at about 6%. The lowest number of seats Labour could win is forecast at 306. If so, Labour would have to form a coalition or govern as a minority government most likely with the Liberal Democrats (LibDem).

Both Labour leader Keir Starmer and LibDem leader Ed Davey have in the past refused to rule out a coalition administration between their two parties. Meanwhile, Starmer said he would never do a deal with the Scottish National Party (SNP) because of a “fundamental disagreement” on Scottish independence.

(iii) Conservatives win the most seats, but not a majority. This is the least likely scenario with less than 1% probability. The lowest and highest number of seats the Conservatives stand to win are 83 and 267, respectively, with the median at 187.

It’s not clear with which party the Conservatives could form a coalition or minority government. What’s virtually certain is that LibDem leader Ed Davey categorically rejected entering an administration with the Conservatives noting “I just want the Tories out”.

As a background, there have been two hung parliaments (no party has a majority) since the turn of the century. Between May 2010 and May 2015, the Conservatives led a coalition government with LibDem. Between June 2017 and December 2019, the Conservatives formed a minority government with the Democratic Unionist Party (DUP) after agreeing to a limited co-operation pact, also known as a confidence and supply agreement.

It’s the NHS, stupid

First, there is fatigue with the Conservatives after 14 years in power. The Tories have consistently trailed in polls by around 20 points since Rishi Sunak took over as prime minister in October 2022. Also, Sunak’s approval rating is low at 31% down from a high of 52% when he was elected despite having restored some sense of economic stability following Liz Truss’s disastrous 44 days in office.

Second, the National Health Services (NHS) is the top issue facing the nation according to the May Ipsos Issues index. Unfortunately, the performance of the NHS under the Conservative Party has been poor as the waiting list for hospital treatment in England rose to a record of nearly 7.8 million in September 2023.

GBP implications

A Labour government would be positive for GBP. The Labour Party under Keir Starmer has moved away from left-leaning economic policies since taking over from Jeremy Corbyn. Indeed, Labour shadow chancellor Rachel Reeves emphasised last week the change in the party to “a party of growth and of enterprise”.

Moreover, Labour leaders pledged to improve relations with the European Union (EU). Starmer is determined to “make Brexit work” but also made it clear there is no plan for the UK to rejoin the single market. Instead, Labour leaders see room for greater cooperation with the EU namely in security and foreign policies.

Beyond the UK political landscape, we are constructive on GBP mostly versus EUR. We estimate long-term fundamental equilibrium for EUR/GBP at around 0.7300, implying a roughly 17% overvaluation relative to the current spot rate. Deeply negative EU-UK real long-term interest rate differentials and the relative monetary policy rate outlook suggest EUR/GBP can correct some of this overvaluation. In our view, the BOE has less scope to cut rates compared to the ECB because UK underlying inflation is higher than in the Eurozone. In April, UK core CPI was 3.9% y/y versus 2.7% in the Eurozone.

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