Recovering Economy Aids Conservative Triumph in UK

The UK general election produced a surprise result, with the Conservative Party unexpectedly winning an overall majority. This was in marked contrast to opinion polls showing a hung parliament, writesOliver Mangan Chief Economist at AIB.

We can only guess that the strong performance of the UK economy helped drive many undecided voters into the Conservative camp on polling day.

The pace of GDP growth did slow to 0.3% in the first quarter from 0.6% in the final quarter of 2014. However, the fact that this was the slowest rate of growth since the last quarter of 2012 shows how well the economy performed in 2013/14.

Despite the slower GDP growth, retail sales figures suggest that household spending has remained strong this year. Retail sales grew by a healthy 1% in quarter one, after showing very strong growth of 2.1% in the previous quarter.

Meantime, the UK labour market remains robust. Employment grew by 248,000 in the three months to February, its fastest pace since April 2014. The strong gains in employment have helped to push the unemployment rate down to 5.6% by February, more than a six-and-a- half-year low and significantly below the 6.9% rate from one year previous.

At the same time, wages are showing tentative signs of a pick-up, with average earnings rising by 1.8% year-on-year in the three months to February.

As in other economies, inflation has been very subdued in the UK in recent months. This has been mainly down to the sharp fall in oil prices. UK consumer price index inflation remained at an all-time low of 0% in March, while core inflation (excludes energy and food) fell to 1%.

Meanwhile, UK housing market indicators have shown tentative signs of improvement after slowing in the second half of 2014. Mortgage approvals increased for a third consecutive month in February, while house-price inflation is picking up again.

Encouraging leading indicators, the improving labour market, weak inflationary pressures, as well as rising real wages and a strengthening eurozone economy, all suggest that the UK economy will remain on a firm footing.

GDP is likely to increase around 2.25% this year and possibly 2.5% in 2016.

The clear election result removes the risk of a prolonged period of political wrangling and instability that could have arisen with a hung parliament. We expect the current stance of economic policy to be maintained, with a further tightening of fiscal policy and little impact on monetary policy from the election result.

One uncertainty arising from the election result, though, is the Conservative Party commitment to hold a referendum on the UK’s continued membership of the EU before the end of 2017. However, this may be less of a worry now than some time back.

The next couple of years are probably the most opportune time in terms of securing a ‘Yes’ vote on continued EU membership, which could put the issue to rest for decades. Recent opinion polls by YouGov show a marked fall-off in support for leaving the EU. The latest polls show about 45% in favour of remaining in the EU, with around 33% wishing to leave.

There is also a Conservative prime minister, who is very much in favour of EU membership and who will never be in a better position to carry the bulk of his party with him on the issue. We would not be surprised if Mr Cameron looks to hold the referendum next year or in early 2017, to eliminate uncertainty.

Leaving the EU would pose serious risks for the UK economy and thus Ireland.

However, the positive reaction of sterling to the election result suggests the market expects the UK to remain in the EU. Opinion polls are also pointing in this direction.