It may all be adding up to an autumn election

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The Independent Online
TRUST the bookies. On Friday amidst the welter of bad news for the Tories, Ladbrokes cut the odds on Labour winning the next general election and naturally lengthened the odds on the Tories. It also cut the odds on there being an election this year. So if the Government cannot last out until 1997, will that put it - on purely economic grounds - at a disadvantage?

The received wisdom is that the economic outlook will tend to improve in the coming months. The present pause in growth will come to an end and consumers will have more time to enjoy the effects of the modest tax cuts in the pipeline. Come November, so this received wisdom would have it, there will be a further expansionary budget, designed to bribe voters not to throw these further tax cuts away by voting the Tories out. So a spring 1997 election would be ideal. Of course, even the Government's most enthusiastic supporters would accept that this may not be enough to secure re-election, but in as far as voters are influenced by the cash in their purses and wallets, hanging on looks the best bet.

But is this really right? A close look at the economic forecasts for the coming year suggests a slightly different proposition, something more like this.

Certainly this coming June looks better than now, and October looks better still. Once one gets into 1997, on the other hand, some dangers start to appear. Spring 1997 may be better than autumn this year, but it is quite possible that it will not.

To see why, let's consider some figures, first for the UK itself, and then for the wider world economy. The big picture as far as Britain is concerned is that this is the year when consumers do rather well, whereas next year the brakes may have to go on. Some forecasts are set out in the charts, which I have taken from Goldman Sachs. Other forecasters would differ in detail, for Goldman expects slower growth this year than most, but they would not tell a radically different story.

Start with GDP. The issue is: when does the present slow-down end? There has been much weak data recently, which has led to the odd scary story about the threat of a dip back into recession. But while that is a real threat in Germany and France it is quite difficult to see it happening here. Exports to continental Europe will be weak, but British consumers will see to it that some growth is maintained here.

Why? Well, British consumers will be richer this year. Aside from the tax cuts there are electricity rebates, the one-off payments from building societies converting to plc status, and falling mortgage payments. Goldman Sachs is at the bottom end of the range of forecasts for this year, expecting growth of 1.7 per cent for the year as a whole compared with the consensus of 2.4 per cent. But even Goldman expects growth in the second half to be running at an annual rate of between 3 and 4 per cent; it is the first half that they are pessimistic about. Further, they expect growth to remain strong through 1997.

If that is right and if economic growth and in particular consumer spending were the main influence on voters, an election any time after this summer would suit the Tories.

There are, however, other influences, and one important one is interest rates. There is no doubt that low interest rates are popular, or rather that high interest rates are unpopular. Just why this should be, given that low interest rates cut the return to savers and the rule of thumb is that the building societies have four savers for every borrower, is a puzzle. But it is true.

Now look at the interest rate graph. The market expects two further falls in interest rates this year, with base rates bottoming at 5.75 per cent. But what goes down must come up, and the market also expects rates to be rising by the autumn. It is true that the market has been spectacularly wrong in its interest rate forecasts, consistently over-estimating them for the last two years; Goldman for its part does not expect a rise until the end of the year and that seems more likely. But there must be a good chance that by next spring the bottom of the cycle will be past, so that were the election delayed until then, it would have to take place against a background of rising rates, albeit from a low base.

In the meantime, it is possible that base rates at or below 6 per cent will give a mild stimulus to the housing market. However, given the overhang of potential sellers who have withdrawn from the market, any rise in housing turnover might simply suck in more sellers and so not result in a recovery in prices.

Prices more generally? Unlike house price inflation which, by and large, seems quite popular, inflation at the retail level is not. The latest Bank of England estimates for the RPI are rather lower than those Goldman projections, but no one sees any real problem on this score. Arguably the longer the Government waits, the better the inflation outlook.

There is one further economic influence - the balance of payments. We are not so obsessed with this now as we used to be, partly because we are no longer tying the exchange rate to anything, floating rates will take the strain, but more because the current account is so near balance as not to be a worry. Here, Goldman expects an improvement this year, and then a slight deterioration next. My concern would be that this may turn out to be too optimistic. If consumers do sharply increase their spending in the second half of this year, they may buy a lot of imports. They usually have in the past. I think it is possible that come the early part of next year we could see some adverse trade figures. They might not be bad enough to frighten the markets, but they would lead to some warning headlines, and might become the trigger for raising base rates. This would not be a disaster, but it could be enough to dent the Government proposition that it is making a success of the economy. One may recall that one set of rogue trade figures in the middle of the campaign was said to have cost Labour the 1970 general election.

So what is the final score? Growth is neutral between October this year and May next. Interest rates look better in the autumn than in the spring. Inflation is neutral, maybe a bit better in the spring. Balance of payments is better, or at least safer, in the autumn.

At the margin the economic outlook in the autumn appears likely to look at least as good as it will in spring 1997. Both are much, much better than the summer of this year when the effects of the pause will still be very evident.

Finally, look at the international context. For the whole of this year the British economy is going to compare well with France and Germany. It will have faster growth, much lower unemployment (though recent declines may tail off), and not much higher inflation. This will help make more credible the proposition that the British way of running an economy, with its emphasis on markets and deregulation, is more effective than the French or German models which the Labour party tends to favour.

But by 1997 France and Germany must be recovering - if they are not, the whole European economy will be in dreadful trouble - so this "British is best" message may be less evident.

Put all this together and my guess is that the autumn will be at least as good as the spring, maybe better, for the Conservatives. That is not of itself a reason for going early, and voters are not motivated solely or even principally by the performance of the economy. But it does mean this. If the economy does not appear a strong enough base for an election campaign come October, it will not look any better by the following May.