Following years of political turmoil in the UK, investors welcomed a greater sense of clarity this month, as 28.7 million Britons cast their votes in the UK’s latest general election. In line with forecasts, the Labour party achieved a landslide victory, regaining power after 14 years and completely reshaping the UK’s political landscape as a result. With 412 of the 650 seats in the House of Commons, the party now has the largest majority since 1997, providing a clear mandate for Keir Starmer to govern. After a sustained period of low growth and uncertainty weighing on the UK outlook, it’s our view that a greater sense of political stability has the potential to revitalise the UK economy and bring new investment into UK, creating a wave of opportunities for UK investors.
What Can We Expect from The New Government?
Throughout the election campaign, Labour’s polices have centred around a desire to provide economic stability, leadership on the climate, NHS restructuring and social reforms. So far, the main priority for Labour’s Chancellor Rachel Reeves is to enhance GDP growth, with the government announcing an ambitious target of 2.5% in annual GDP growth, a significant step up from the lacklustre GDP growth of recent years, with a growth figure of 0.1% recorded for the UK in 2023. Labour plans to achieve this growth through investment and fiscally responsible spending, prioritising spending over tax cuts.
According to the new Chancellor, a key component in this bid to boost UK growth will be the implementation of a National Wealth Fund, which will see £7.3 billion spent by the government towards clean energy projects and infrastructure development. With the funds allocated towards upgrading ports, gigafactories, rebuilding the UK’s steel industry and various green energy implementations, the project aims to act as a middleman towards investors and the government, with a predicted £1 invested by the government for every £3 by investors. The goal is to generate growth throughout key areas of British manufacturing and green technology, driving private investment throughout the UK economy. The government appears to be focused on making the UK more attractive for businesses and investors, creating a more favourable backdrop for UK assets and investors moving forward.
Another key element in the government’s plans to grow the economy is through aggressive housebuilding targets, with a goal to build 1.5 million homes in the next 5 years. Historically, the UK has built an average of 250,000 homes a year, with figures just under 235,000 in the last two years. Labour aim to achieve a target of 300,00 per year through reforms of planning policy alongside the reintroduction of compulsory house building targets. The aim of the policy is to increase housing supply and make housing more affordable on a wider scale, getting more people on the housing ladder and creating sustained economic growth.
Alongside these commitments, the government also announced plans to create ‘Great British Energy’, a publicly owned clean energy company focused on securing UK energy resilience. The company will focus on green energy and the renewables sector with the hope of lowering energy bills throughout the UK, with the aim of protecting UK households from price shocks such as those seen at the start of the Ukraine war which contributed to a cost-of-living crisis for households across the UK.
How Will Policies Be Funded?
With public finances remaining stretched, the government is planning to abide by its own strict set of fiscal policies to maintain a balanced budget which meets its day to days costs effectively, while also reducing the deficit by the 5th year of government. Fiscal responsibility will be crucial for the government to implement its economic and social polices throughout the term without experiencing budget constraints. The Office for Budget Responsibility currently predicts the government is set to face a miniscule fiscal margin of £9 billion. This means it’s unlikely that we will see any large-scale government spending, with potential for tax rises and public sector cuts to come unless the government is able to generate greater growth than currently forecasted.
A Brightening UK Outlook
With greater clarity on the political landscape in the UK alongside an improving growth outlook, the future is beginning to brighten for UK investors, with opportunities to create long term gains from UK-based investments. After a period of low growth and muted returns for UK assets, it is our view that the UK equity market is now particularly well positioned and attractively valued compared to peers, with an opportunity to benefit as the UK economy recovers and interest rates decline.
While inflation will undoubtedly remain a key focus for policymakers in the coming months, data suggests that the economy has turned a corner on inflation, with the headline rate falling back down to 2% in June, putting pressure on the Bank of England to consider cutting interest rates in the short term and provide much needed stimulus to the UK economy. As a result, UK equities and fixed income assets are expected to benefit as market conditions improve, with domestically focused and cyclical stocks expected to benefit the most in the short term.
Overall, it is clear that the new government has a lot of work to do to achieve its policy pledges and promote growth within the UK economy, with the coming months remaining crucial for the government to lay out plans to deliver on its promises. Economically, the UK appears to be turning a corner, which should support the government in its plans and provide some much-needed investment into UK assets. For UK investors, the outlook looks bright.
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