By Tirthankar Mitra
The national elections in the United Kingdom is scheduled to be held on July 4. Its outcome will rejuvenate or further destabilise the pound. Indeed the upcoming election represents a crucial juncture to the fate of a currency which had seen better days. The pound has witnessed significant volatility since 2016, post the Brexit votes.
The economic scene in the UK is fraught with challenges. Foreign Direct Investment has seen a decline in the four of the last five quarters upto the end of 2023. On the other hand, public debt is at a 63 year high. It calls for coherent and effective economic policies from the next government.
The key issue at stake is investor confidence. The pound's recent rally reflects market optimism. Led by Keir Starmer, the Labour Party, currently ahead in the opinion polls, promises stability. Departure from the tumultuous political climate of the Conservative Party is among the Labour's poll pledges.
Strengthening the pound is not an open and shut job. Investors are only too aware that the Labour will need to balance its spending with prudent fiscal measures. A dual challenge confronts Labour. It has to stimulate economic growth and has to manage a high debt to GDP ratio.
The Conservative government's economic fiasco remains fresh. The failure of the mini-Budget under Liz Truss, which caused a market rout has not been forgotten. Once in power, the possibility not being unlikely, Labour is unlikely to go for austerity measures. Increasing taxes or borrowings is a likely way out. Market trust needs to be retained with a delicate managing act.
In sum, to bolster the pound and reverse the cycle of volatility and economic uncertainty, the Labour has to present a credible economic policy. It could be a tonic for the pound's revival. But the exact policies of the Labour remaining opaque have created a knowledge vacuum. It could lead to market jitters.
It would be risky if the Labour Party's policies lead to inflationary pressures and have adverse effects on the bond market and sterling. The sterling could see a modest appreciation if the Labour governs with stability and avoids excessive spending. A balanced approach is called for from the new government.
Such an approach can instill confidence and predictability in the markets. It would go a long way in reversing the negative economic feedback loop of the uncertainty of economic policy and the stress of the financial market.
Prime Minister Rishi Sunak is fighting a grim battle on behalf of the Tories as already a mood has been created in the country that the Tories are losing and the new Prime Minister will be Sir Keir Starmer. The stock market is also reconciled to this as Starmer has attained the present position in Labour by ousting the hard Left Jeremy Corbyn who led the Labour to big defeat in the last Parliament elections.
Since then, the political wind has changed going against the Tories favouring the Labour Party. Right now, three days before the elections, the Labour is having 20 per cent lead against the Conservatives in opinion polls, despite Prime Minister Sunak's latest attempts to reverse the declining trend in the eonomy.PM is also leading a divided Party with a number of factions pitted against each other.
The Labour Party is also not united, though for the time being Starmer is projecting a united face. Many pro Left members have not been nominated. The powerful trade unions are jittery. They feel that Starmer will be no different compared to Sunak relating to the approach to the workers and pro-people schemes. Starmer will be facing a tough task even after his projected win on July 4 polls. (IPA Service)
