Paul Diggle
Hello and welcome to Macro Bytes the economics and politics podcast from abrdn. My name is Paul Diggle
Luke Bartholomew
and I'm Luke Bartholomew.
Paul Diggle
And this week we are speaking about a trio of big political events in the UK, in France and in the US. We want to talk about what each of these seismic political changes or potential changes mean for economies and markets. So we're delighted to be joined by Lizzy Galbraith, Political Economist at abrdn. Welcome, Lizzy.
Lizzy Galbraith
Thanks for having me back again.
Paul Diggle
And before we get started, I should say that we're recording on Tuesday the 9th of July. Lots of things are moving pretty fast in global politics at the moment. So, Lizzy, let's start by speaking about the UK and focusing on the election results.
Obviously it was a thumping majority for Labour, but slightly smaller than some opinion polls had suggested, but on a pretty small share of the vote. What are your kind of key takeaways from the actual details of this electoral result?
Lizzy Galbraith
Yeah, so just to run through the results very quickly, Labour, as I think most people will by now know, won a very large majority. They are sat on 411 seats now. The ConservativeParty fell to 121 seats. The Liberal Democrats had their best result ever on 72, and the SNP had an extremely difficult night, falling to nine seats overall. And then we have had some gains for the smaller parties as well, Reform, the Greens and the independents as well, all gaining seats in this election.
But as you mentioned, the real surprise here was actually the vote share itself. Labour gained 211 seats, an enormous gain from 2019. But they did that with just a 1.6% increase in their vote share. So we have a relatively unusual situation here. If you look under the hood of the results, where Labour have a very large majority, but there will be some, I think, particularly in the ConservativeParty, that would argue that they don't necessarily have a large mandate as a result of this election and it may well be that we are in, over the medium term, heading to a lot more volatility in our political system. There's a lot of marginals out there now as a result of this election - and I think a key question for Labour is going to be just how replicable a result like this is going to be in five years’ time. And as a result of that, they are going to need to make good on some of the promises that they've made over the course of this campaign if they want to keep this electoral coalition together over the medium term.
Paul Diggle
Yeah, that really efficient distribution of the votes, which worked very well under the ‘first past the post’ system, but, you know, signs of a more fickle electorate - all those marginals you're mentioning, Lizzy as well means that perhaps Labour can't rely on this being the start of a of a decade of government. So the onus is really on delivery. Give us a bit of a sense of the itinerary, the kind of, the choreography from here, about the 100 days, the coming Budget, what are the key way marks?
Lizzy Galbraith
So there are a few big set piece events that we know that the government is committing to. So we have the King's Speech coming on the 17th of July that will set out the legislative program that this new government will have over the next year or so. And that will set out, we think the bills to do things like establish GB Energy - Labour's publicly-run energy company.
We think that the package of workers’ rights legislation is also going to be included in the King's Speech, as well as things like planning reform, for example. So some of those big priorities that Labour have that are going to take time to bed in, we think those are going to be included in that first King's speech. And it's really something that sets the tone, sets the intention for the early days of this new government.
Following on from that, we will of course, have, a parliamentary recess. I shortened one compared to the normal summer recess that Parliament takes, but nonetheless, for the majority of August Parliament will not be sitting. They'll come back for a little bit of September and then we'll have party conferences. Obviously, for Labour, that's going to be their first party conference in government for over 14 years.
For the Conservatives, it may well be a slightly more subdued affair, but we should have a new Conservative leader by that point so their conference may well be the point by which they introduce that new leader to certainly the wider party and the public as well.
Following that, we would expect an autumn Budget to be held probably in October. Rachel Reeves has said that she wants to give the usual period of ten weeks’ notice to the OBR for that Budget, so we will know in advance what that date is going to be. But she hasn't called it yet, so we're now assuming that rather than a September Budget it will be in October following those party conferences. And around about that time as well we'd also be expecting a spending review which sets departmental budgets as well. So there's quite a lot to cram in just in terms of the Parliamentary choreography over the next few months, and that's not even accounting for the fact that Keir Starmer is currently on his way to Washington for a NATO meeting. And then we also have a meeting of the European Political Community in not too long as well. So, there's also lots of foreign policy meetings going on as well that the Labour Party will be very keen to sort of set out their stall, introduce Keir Starmer and Foreign Secretary, David Lammy, to the global leadership and UK allies as well.
Luke Bartholomew
And on the Budget and spending review. I think it is very important to stress that while boosting UK economic growth is absolutely crucial to Labour's governing strategy on delivering on its political priorities and keeping this voting coalition together, the route to that growth isn't really through fiscal policy, so I think the Budget and the spending review, both the first and indeed a consistent pattern through this Parliament, is likely to be more about shifting the balance of tax and spending rather than outright fiscal stimulus. And there are several reasons for that. First, just there is very limited fiscal space to do fiscal stimulus, both because of the existing fiscal rules which Labour have committed to sticking to, at least for now. And even if those are tweaked to provide a little bit more space, there is still the fundamental issue that there probably just is limited room for the UK to borrow.
And that's related to the second point, which is that the UK's constraint on growth right now isn't really about demand. You know, after the financial crisis, when unemployment was elevated, interest rates were effectively at the lower bound, it is plausible that significant fiscal stimulus would have been an important boost to both short-term and medium-to-long-run growth. But with unemployment low and interest rates high, that is much less true. The constraints on growth in the UK are much more about the supply side of the economy, ultimately its productivity and potential growth. And so Labour's strategy to boost growth really does run through boosting the supply side. And in particular, they have three, policy agendas in mind, one of which is on planning - so liberalizing the planning regime to make it easier to build houses and infrastructure. One of which is on, industrial policy, green industrial policy, things like GB Energy taking a leaf perhaps out of the Bidonomics textbook. And then the final one is on closer ties with the EU, albeit without rejoining the key European institutions of the customs union and single market.
But Lizzy, I guess Labour is far from the first government to come to power wishing to boost UK productivity and potential growth. And to be honest, most governments recently haven't had much luck in that regard. So what chances are there that they will be able to succeed on this agenda?
Lizzy Galbraith
Yeah, I think you're right. Like these are issues that are quite commonly identified by incoming governments. Some people may remember that Boris Johnson came into government in 2019 talking about planning reform and wanting to level up the country through building a lot of new infrastructure and housing and that planning reform never really materialised in any significant way. So I think it is, you know, it's easy to diagnose the problems, it's far more complex to actually provide the solutions of sufficient scale that, that's needed in these instances. It's something that I think, you know, is going to be pretty tricky for Labour. But nonetheless, there are reasons, I think, to be optimistic that maybe Labour can improve some of these metrics. I think particularly planning, you know, there are reasons to think that maybe Labour's electoral coalition maybe not only makes planning reform easier to pass but also maybe makes it necessary.
You know, Labour have, generally speaking, a younger more urban voter coalition, and tend to be more likely to be renters. These are people that really do care about affordable housing, seeing more houses built. So there's maybe more pressure on a Labour government actually to pass planning reform, whereas Conservative governments in the past have actually found it difficult to persuade their electoral coalition that the practical realities of planning reform are actually a good thing.
So it may well be that this is something that's easier, maybe not easy for a Labour government to pass and certainly with a large majority, you would expect them to be able to, you know, lose a few MPs along the way in the process of getting some of these reforms passed and still be able to make these things happen. So I think there's reasons to be optimistic around this, and certainly the early days of this government have shown that Labour's intending on making moves to prioritise these issues early, which again is a positive thing. They're going to take time both to pass and then to bed in and for us to see the effects of these measures should they actually be passed. So I think it's good that we're seeing these prioritised early on in the parliamentary term as well.
Paul Diggle
So let's shift to the other side of the Channel and Lizzy and talk about the French election outcome, because this Sunday was the second round of the French Parliamentary elections - and it held some surprises as well. It was a hung parliament, which I think we expected, everyone expected, but it was the far left that did the best. Tell us what your kind of your takeaways from those election results were.
Lizzy Galbraith
Yeah. As you said, a bit of a surprise result in that really the results flipped around from the first round of the French Parliamentary elections where we saw National Rally come in first. In the second round, National Rally actually came in third with 142 seats. Emmanuel Macron's Ensemble coalition came in second with 161. And then New Popular Front, which is a new coalition of the left-leaning parties in France, came in first with 188 seats, and that was the real surprise. They'd come in third in the first round of voting and really what we saw here was a story about tactical voting in France.
We had the centrist and the left-leaning voters really vote tactically to avoid the election of National Rally candidates. And even though National Rally actually secured nearly 40% of the vote in France, they weren't able to translate that vote share into seats because of that tactical voting. So a bit of a surprise there. But really, the upshot, as you said, is that we have a hung parliament as we expected, and it's a very divided hung parliament as well.
You really have three relatively evenly split camps now in the Parliament, and they don't have a huge amount in common on politics or policy.
Luke Bartholomew
So, given that very divided Parliament and indeed divisions in the NFP party as well, what is a plausible path for how governments or coalitions could come together?
Lizzy Galbraith
So, as we see at the moment, and it's very early days in this process, I think there is a reasonable expectation that there could be surprises along the way here, given that France is in fairly uncharted territory. Coalition formation is not something we see often in the French system, but at the moment we think there are three main plausible routes forward here. The first being that the New Popular Front attempt to form a minority government. Now, the key for this scenario is that they would have to agree on a prime ministerial candidate, and that's something that they weren't able to do during the campaign itself.
They're a fairly internally-divided coalition, really set up to try and provide a unified opposition to National Rally during the election and they don't have a lot of experience of actually working together. So, they're going to be susceptible, I think, to continued division. There's a lot of different big personalities in that group. And as things stand, they haven't been able to agree on a candidate that can unify them all as Prime Minister. So that's the big test in that scenario.
The other thing that we may well see is that Macron tries to split off some of the more moderate left groups in that coalition and try and persuade them to join a coalition with his Ensemble party. So in that situation, we see maybe the Greens and the Socialists split away from the New Popular Front and join Macron's Ensemble coalition and we have a sort of ‘rainbow government’ across the center and the center left. Now again, that would be fairly complicated to administer. They would need to agree on a prime ministerial candidate and there would be a lot of policy concessions in that scenario as well. A key issue is what would happen to things like Macron’s pension reforms which were passed last year and are very controversial in France. Almost all other parties outside Ensemble ran on a platform of reversing those reforms and that includes the Socialists. So there would be a lot of pressure on Macron, as part of the price of any deal there, to at least moderate those reforms, if not wind them back entirely. So there's a lot of questions there about whether that route is going to be feasible, given Macron views that as a legacy issue.
And then given all of these barriers we have to government formation then the third option we have here is a technocratic government that steps in as a caretaker in the event that no other governments can be formed, or maybe other options are tried and fail, and that technocratic government basically stays in place until elections can be called again in a year's time and we shuffle the cards for a second time and see if something more stable emerges. But I think it's worth also noting that all of these three things can come to pass. It's very possible here that we see multiple attempts at forming governments in France over the next few months. They may not well be particularly long-lived but we may well see all, some, none of these different formations attempted in the coming months.
Luke Bartholomew
And then looking forward to 2027 the date of the next French presidential election. I mean, as the gap between the first and the second round has proved to us once again, a week is a very long time in politics let alone a few years. But is there anything sensible that we can say now about how that contest in 2027 is shaping up?
Lizzy Galbraith
I think it's still the case that it's going to be a pretty difficult race for any centrist candidates in that election. Obviously, Macron can't run, but it's probably a fairly difficult landscape for his successor or any sort of centrist candidate in that election. A lot of the political momentum in France seems to be with Marine Le Pen on the right, and then Melechon on the left. So we are seemingly entering an era of quite polarised French politics where the momentum is not with the center as it has been for the last decade or so in France but actually with candidates potentially on the far left and the far right. And that is going to be quite a complex governance picture in France even in the event that we see a more stable parliament emerge at some point.
Paul Diggle
I think we can also say that France’s economic and fiscal challenges will still be present come 2027 because they're after all structural in nature. They go beyond the specific event risk associated with any particular election. Things like low growth, high structural Budget deficits, the difficulty of reforming the Labour market, the pension market. You know really hard won gains of Macron's which are now possibly going to be unwound. And then any government resulting from this hung parliament is going to really struggle to do the sort of fiscal consolidation that the European Excessive Deficit Procedure requires. So while markets I think have on the whole and this result has been taken in a mixed way in financial markets, but there's certainly some silver linings - that a hung parliament can't do the sort of large fiscal expansion that both left, and in parts the right, we're talking about. But equally, I think we shouldn't lose sight of these economic and fiscal challenges being structural in nature. And perhaps we even talk about France as being more like a periphery than a core European economy. And I suppose periphery / core that divide doesn't have the same bite as it had during the Euro crisis, both because parts of the periphery have moderated - think Meloni in Italy - also because the ECB has a much deeper toolkit now to protect the existential state of the eurozone. And indeed, we're not talking about eurozone break-up risk here by any means. That is no longer an explicit part of the agenda on the right and to the extent that there's a lot of hostility to European institutions on parts of the left, a lot of that's likely to get moderated away in a hung parliament.
But, you know, it's interesting and telling that France, which is now in an Excessive Deficit Procedure will struggle to deliver the sort of fiscal consolidation that the Excessive Deficit Procedure requires. Because of that, it's no longer eligible for certain parts of the ECB’s toolkit that it can use in extremis to protect the integrity of the eurozone.
So pretty telling that of France's shifting position in Europe that it's actually locked out of some of those key financial stabilisation mechanisms.
Luke Bartholomew
So having, shifted across the Channel previously, perhaps we can shift across the Atlantic now to the US political situation which is also very rapidly moving at the moment, with Biden's chance of securing the Democratic nomination having fallen below 50% in betting markets after what was considered his very poor showing in the recent debate.
I mean, I think that other 50% that isn't Biden is spread between quite a range of different candidates, and the fact that there is this range probably goes some way to suggesting how difficult it might be to find a natural successor to him. But, Lizzy, can you give us a sense on what the state of the race is at the moment?
Lizzy Galbraith
Yeah. So as you mentioned, since the presidential debates a couple of weeks ago now, there has been a lot of speculation about both Biden's suitability as a candidate and also whether or not he can viably remain as a candidate - whether or not he actually holds the backing of the wider Democrat Party in the aftermath of that debate.
So just to recap quickly, the debate between Biden and Trump, as you mentioned was viewed as a particularly weak performance by Biden. It's raised a lot of questions about his age, whether or not he was able to continue in the race, and we saw quite significant polling movements in the wake of that debate.
The opinion polls had actually been closing prior to that debate. Biden had narrowed the gap between himself and Trump and that gap has widened back out again. And actually has widened more substantially than we've seen in a while, particularly in the six swing states which are the crucial metric that we're really looking at here. They are going to be the deciding states in this election and Trump is ahead in all six - in quite a few of them actually by quite a substantial margin at this point. So we've seen quite a strong poll movement. And in the wake of that, we've also seen, some quite vocal Democrat concern about whether or not Biden is the right candidate to continue in this election against Donald Trump.
Now, crucially, I think it's worth pointing out here that in the US system there aren’t a huge number of viable ways in which you can remove a sitting President from a ticket if they don't want to go. So for all the speculation about whether or not we could see, you know, delegates withdraw their support for Biden at the Democratic convention or whether the cabinet could use the 25th Amendment, there's really very little practical chance of these things happening. And actually, the most realistic way that we would see Biden leave the ticket is of its own accord, that he decides that actually this pressure is too great, that the polling slide is too significant and he leaves the ticket voluntarily. If he chooses to stay in the race, and as things currently stand, he has been consistently saying that he will do that, there isn't really a lot that anyone in the Democrats Party or anyone else can actually do about that. He would remain in the race and he would remain the candidate. I think the broader challenge here is that actually the speculation, regardless of what happens to Biden, is not a positive for the Democrat chances in November. Whether it's Biden on the ticket or whether we end up with someone else, this speculation is damaging to the Democrats’ chances of retaining the White House next year, and we already had anticipated Trump being the favorite at this point. It's only solidifying that view going into, the convention season in the US.
Paul Diggle
And we did a previous episode on how investors can use scenario analysis as a way to think through different political, economic risks. And I think this is nowhere more relevant than thinking about US electoral outcomes, because we sort of know what a Biden or other Democrat second term would bring, you know, a continuation of Bidenomics, protecting a lot of first-term legislative achievements, continuing the so-called ‘small yard high fence’ trade and industrial policy which involves quite high tariffs on a select number of strategically important goods, an extension of some, but not all, of the Trump-era tax cuts. Perhaps not the passing of major new pieces of legislation, because likely, even in the event of a Democrat presidency there could well be a split Congress.
But it's really very uncertain what the Trump presidency would mean. There is a version of a Trump presidency which is really market friendly, that involves tax cuts or deregulation, that looks a little bit like the first half of Trump's first-term. But there are also versions that look much less market-friendly and much more damaging to the economy, that involve trade war, that he is quite literal when he talks about 10% global tariffs, 60% tariffs on China. And then there's perhaps a third version, which is both of those things, which is a kind of confusing and a heady mix for financial markets. What we could say is that a through line across all of that is that a lot of those measures look inflationary. So they are a potential challenge or threat to the cyclical macroeconomic development of the past year or so which has been a moderation in inflation.
Luke Bartholomew
So, interestingly, following that debate, where betting markets seemed to put a much bigger weight on the possibility of Trump winning, markets seem to behave in that way that was consistent with the market friendly scenario you were describing there Paul. But it is worth saying that similar event studies that were done during the debates back in 2016 between Trump and Hillary Clinton gave us, in the end, quite a misleading signal as to how markets would behave. They suggested that Trump winning would be quite risk-off, which is obviously what it didn't turn out to be,as such. So perhaps there is a limit to how far we can extrapolate the recent market moves.
But anyway, I think that is all that we have time for this week. No doubt these are topics that we will come back to again in the future. But for now, as ever, let me remind you to subscribe and like wherever it is that you get your podcasts and thank you for listening and to thank Lizzy for joining us. So thanks very much and speak again soon.
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