In its way, the response of the stock market to the Conservative victory in the general election said it all about the British economy. Shares in banks, upmarket estate agents, outsourcing companies and firms employing plenty of zero-hour contract workers all surged. The City, property speculation and a service sector running on cheap labour: for all the talk of rebalancing, repeated by David Cameron on the steps of Downing Street, that’s where the action is.
There was, of course, another reason why the Square Mile was running short of Dom Perignon: most of those working in dealing rooms stood to lose personally from a Labour government. They live in big houses, they would have been liable to income tax at 50% and they would have been hit by a bankers’ bonus tax. Never has the phrase “relief rally” been more appropriate.
There will be plenty of discussion about why the opinion polls got it wrong. The answer seems to be that not enough voters trusted Ed Miliband to run the economy, something the polls have been picking up for the past five years.
Once lost, a reputation for economic competence is hard to regain. Labour is still paying a heavy price for being in charge during Britain’s worst recession since the 1930s, and struggled to challenge the Conservative narrative: Labour failed to mend the roof while the sun was shining and left the country broke when the crisis arrived. Veteran MP Gerald Kaufman once described the 1983 Labour party manifesto as the longest suicide note in history: Liam Byrne’s 2010 note when he left the Treasury, saying that there was “no money left”, was the shortest.
The sobering news for whoever replaces Ed Miliband is that over the past 40 years, governments have only tended to be turfed out after a really severe economic shock. The Winter of Discontent did for Labour in 1979. The Conservatives never recovered from Black Wednesday in 1992, and Gordon Brown lost as a result of the global financial crisis. Long periods of one-party rule are the rule not the exception in the UK, so unless something terrible befalls the economy in the next five years, the Conservatives can be reasonably confident of doing well again in 2020.
All that said, the euphoria in the City is unlikely to last long. That’s not to minimise the election result, but rather a reflection on the nature of financial markets: they quickly move on to thinking about what might be the next big thing. They were already back to fretting about a possible Greek departure from the euro by the time Cameron returned from seeing the Queen at Buckingham Palace.
There are three homegrown factors that could derail the economy in the months and years ahead. The first is that growth remains too dependent on financial and business services in London and the south-east, and too dependent on low-paid services everywhere else.
The second factor is politics. Conservative strategists will already be thinking about how to win again in 2020, and the best way of doing that is to get the economic and political cycles aligned. That means the government will want to front-load austerity in the hope that healthier public finances will permit tax cuts from the middle of the parliament onwards.
This strategy resulted in a sharp slowdown in growth in the first two years of the 2010-15 parliament, but given the election result, the Conservatives will be minded to adopt the same approach a second time.
The third factor is the possibility that Britain might vote to leave the European Union in the referendum that will now take place by 2017. Sterling came under pressure when there appeared to be a possibility that Scotland would vote for independence in last year’s referendum and would certainly do so again if markets thought there was a realistic chance of Britain leaving the EU.
Of the obvious threats, Brexit from Europe is the biggest. There are, though, Black Swan events that are impossible to predict, of which the global financial crisis was one. David Cameron has to beware the unknown unknowns as well as the known unknowns. He will find it harder next time to blame his legacy if the economy turns sour.
