The U.K. Political and Economic Farce

Jun. 7.09 | About: iShares MSCI (EWU)

The UK economy is slowly recovering. The green shoots of consumer demand, stabilisation in house prices, a 3 month stock market rally, the banking sector back in profit and deals being agreed in a buoyant commodity sector are collectively more than adequate evidence. There is still much work to be done, but a return to growth is highly probable in the not too distant future. Ironically, some of the credit can be allocated to the same institutions and quasi-governmental bodies that got us into this debt fuelled mess in the first place, but nevertheless, there is now clear light at the end of the recessionary tunnel. Of course there is always a chance that the fragile recovery will fade and the recession will be prolonged, particularly if business and consumer confidence in UK PLC has a reason to retreat.

So what is the biggest threat to growing confidence and a successful UK economic recovery? I believe the largest single threat is further political chaos. I would suggest our British politicians should be in back-to-back meetings creating an environment in which the unemployed can get back into work. They should be working with the Bank of England to ensure the £125bn stimulus package is used as quickly and efficiently as possible. Or, equally important, cutting back on red-tape in an effort to reduce the country’s growing debt burden, predicted to be £175bn in this tax year alone. Unfortunately, such crucial objectives hardly got a mention this week. The country had to suffer politicians, the names of whom were largely unknown to us a month ago, whinging over their career prospects or smirking at cameras with “rocking the boat” badges in an appalling episode of self-indulgence and self promotion. The local election results, in which Labour received its lowest ever share of the vote, will produce further unbearable months of political back-stabbing and manoeuvring, probably all the way to the next general election.

Meanwhile, Barack Obama was giving a free master-class in statesmanship, touring the Middle East and receiving standing ovations from Arab audiences on his vision for the region and the world. I can’t imagine Obama has been busy submitting dubious expense claims for a non-existent mortgage either.

I empathise with readers who feel economic and stock market reviews should minimise political banter but UK politics and economics have never been more closely aligned, except during the World Wars. Further evidence of the political impact on equities and currencies was seen this past week, when both the FTSE and Sterling, fell back sharply, albeit temporarily, on unfounded rumours that Gordon Brown had resigned. Politics is markets.

Other news included a hold on interest rates. The Bank of England monetary policy committee voted to keep rates at 0.50%. The decision was in line with expectations and analysts were more focused on possible policy changes to the additional stimulus package, which so far has allocated around £125bn of the £150bn budget for boosting economic growth and lending. A number of commentators quite rightly suggested that that impact has been less than forecast and the remaining £25bn, yet unallocated, will need to be utilised over the summer months unless lending activity accelerates from the current sloth like rate of growth.

Disclosure: The writer holds no shares or other financial instruments that offer either direct or indirect exposure to any company listed in this article.