This time around, it looks as though attention is more likely to focus on the Brexit negotiations because these in turn will have a much greater influence on financial markets than any measure of interference from meddling politicians. And, by and large, this process will be translated into uncertainty and volatility whoever wins, simply because no one can be sure of the exit terms until much later in the process. This could take years.
The effect on sterling is just as complex. In previous elections, the pound has generally risen after a Conservative win but the extent to which it would decline if there were a Labour victory or hung parliament is more difficult to predict because it has already weakened significantly since the referendum last June. Much will also depend on the size of the majority, assuming the Conservatives win. Calling for a strong mandate to negotiate Brexit (which would also negate the ability of the trouble makers to influence key votes) is fine, but only if that mandate is delivered by securing a large majority. Any other outcome will only serve to disrupt financial markets, while the popular press will have a field day predicting economic doom, much in the same way as they did following the referendum; and they were wrong then too.
However, a fall in sterling creates problems, not least because the UK continues to run a large current account deficit, and greater levels of uncertainty are likely to make this harder to fund.
In a way, the outcome of the election will more likely serve as a useful barometer on how the Brexit process will pan out. The Conservatives are likely to adopt the most aggressive stance, which would increase the possibility of an exit without any clear deal. Ironically, as they seem to be more EU friendly, both Labour and the Liberal Democrats could conclude a deal and even have another referendum. Out of all this, one thing remains certain and that is that uncertainty will prevail until the outcome of Brexit is translated into hard facts.
Next week's economics
Tuesday sees the release of inflation numbers, and once again the pound's performance is likely to play a key part. The consumer price index in May grew by 2.7 per cent on a year-to-year basis, but this comprises the sort of inflationary elements that are harder to influence through the normal array of monetary mechanisms. This is because the current inflation is not generated by excess demand pushing prices higher; that's easier to control, but by imported inflation. This can be seen from the inexorable rise in producer prices on the input side, also due for release on Tuesday. In the year to April, these rose by 16.6 per cent while output prices grew by just 3.6 per cent. On Wednesday, employment data is expected to show little change in the claimant count or the overall number of unemployed, while weekly average earnings are expected to continue lagging the rate of inflation. This will put a further squeeze on disposable income, but of equal importance it will affect consumer sentiment. Thursday sees the release of retail sales for May. This is a volatile number when taken on a monthly basis simply because a late or early Easter and good or bad weather have a significant influence. And on Thursday, the Bank of England takes its monthly decision on whether or not to move base rates from the current 0.25 per cent. Monetary policy as a means of supporting the economy has very few if any tricks left in the box, and it's hard to see how any sharp drop in sterling can be avoided, not least because a wobbling economy would not be best served with a hike in interest rates.
