City sees economy as election winner

The strength of the economy means the outcome of the general election could be much closer than opinion polls at present suggest, according to one of the City of London's leading investment banks.

The research, which supports Kenneth Clarke's claim yesterday that the Tories could win if they fight the election on the economy, was sent to investors yesterday by the US-owned bank Lehman Brothers.

Linking economic indicators and voting intentions, it predicts that the outcome of the election could range between a Labour majority of 43 and a hung Parliament with Tony Blair 41 seats short of an overall majority.

According to Michael Dicks, the Lehman Brothers expert who carried out the research, it could be a much closer result than expected. He calculates that consumer confidence and the number of households with negative equity, explain past voting intentions far more accurately than unemployment and interest rates.

Mr Dicks said: "The results of our research suggest that the economy does seem to matter quite a lot." Consumer confidence also reflected other influences such as take-home pay and feelings of job insecurity, he said. Including a measure of negative equity explains the much bigger drop in support for the Conservatives from 1992 than traditional economic indicators alone account for. Others suggest that sterling's ejection from the Exchange Rate Mechanism was to blame.

The number of UK homes affected by negative equity has fallen below half a million for the first time since 1990, according to a new survey from the Woolwich Building Society. It said 475,000 home-owners are affected, a drop of 65,000 in three months - a factor that could be rewarded by an improvement in the Tories' polls.

Hamish McRae, page 19