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Tuesday, June 13, 2017

Wobbly Britain

Or is it just the politicians?

As the dust settles on last week's general election independent economic consultant Peter Stanyer comments on the potential implications for investors

The inconclusive results of the UK’s general election on 8 June matter for investors, even if they do not suggest any obvious need to change strategy.  The immediate financial result will have been a modest boost to investment performance as further sterling weakness lifted the performance of globally-diversified portfolios for UK investors.

Positive short term performance is always reassuring.  But the longer perspective matters more.

For the UK economy, the election impasse probably means the likelihood of a disruptive exit from the EU has diminished, though the price to be paid for that seems almost certain to be an embarrassingly large continuing payment to the EU.

For UK economic policy, it probably also means an acceptance by the UK government that it does not need to aim for budget balance, let alone a budget surplus as there is likely to be growing recognition that it could easily service moderate borrowing for the indefinite future, although that leaves little lee-way for potential economic disruption.

At today’s extraordinarily low interest rates, a willingness to keep borrowing makes evident sense when the country could easily benefit from higher public investment in infrastructure - including public housing.

In the longer term economists agree that the key to prosperity, and so the affordability of social welfare programmes, is economy-wide productivity growth.  It is unlikely that a future Labour government (which now seems to be a real possibility in the next few years) will offer much prospect of improving efficiency, though higher minimum wages might just force more business productivity.

More likely is that a consequence of the election is an easing up of spending discipline in the public sector and a return to reluctance by any UK government to tackle difficult welfare challenges against an over-riding imperative to improve short term election prospects.

Postponing consideration of impending expenses rarely makes economic sense, though it will always be attractive to insecure politicians.

For UK investors, global diversification has rarely seemed so attractive.

Peter Stanyer, independent economic consultant to The Financial Planning Corporation LLP
13 June 2017

Peter is the author of The Economist Guide to Investment Strategy, 3rd edition, Profile Books, 2014.  The views expressed are his own personal views, and do not constitute advice to buy, sell or hold any investment.

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