A general election is just over a year away and Labour Leader Ed Miliband is taking a decidedly aggressive line when it comes to big business. A looming vote on Scottish independence and questions over the UK’s relationship with Europe add to the potent political mix. “We’re now moving into a period of substantial political uncertainty… around European elections, Scottish independence, a general election, and a potential EU referendum,” said CBI President Sir Mike Rake at the recent CBI conference.
So could investors, blinded by growing optimism on the recovering UK economy, be underestimating political risk? Jeremy Tigue, manager of Foreign & Colonial Investment Trust, thinks this could indeed be the case. He points out the City tends to be “instinctively Conservative” with an assumption that the Conservatives will win the next election - something that Mr Tigue warns is “not a done deal.” He expects to see companies putting investment decisions on hold ahead of the election and, “more and more companies being caught in the political crosshairs.”
On the plus side, there could be a bit of a pre-election boost for the economy as the current government aims to create a feel-good factor going into the next general election. “UK elections next year will lead to an element of pump-priming to add to what are already relatively strong consensus growth forecasts,” says N+1 Singer head of research Mark Gibbon. Analysts at Credit Suisse concur. “We believe policy will remain highly stimulatory through 2014, with the government mindful that the next election is scheduled for May 2015.” They point out that better than expected UK economic growth has led to a windfall worth an estimated 1.2 per cent of GDP for the government, which is likely to find its way into higher spending commitments. There is still a big chunk of the Funding for Lending scheme to come through and the increase in the minimum wage should provide a boost.