- What was the real reason Theresa May called the snap June 8 election?
- Most people think it is because Labour is doing so badly in the polls she thought it would offer her best chance for victory.
- But the economic data is turning against her.
- GDP, retail sales, income tax receipts, and house prices are trending down.
- May's hand may have been forced by the economy, not Labour's misfortunes.
Prime Minister Theresa May told the nation that the reason she called a snap general election for June 8 was to clear the parliamentary roadblocks to Brexit and strengthen her hand in the Article 50 European Union trade negotiations.
But the most recent economic data for the UK show that May might have concerns about the longevity of the Conservatives' popularity in the polls: Economic indicators that help governments retain their majorities have peaked and are turning away from the Conservatives, some data show.
Generally, economic growth helps the sitting government. Downturns and recessions are better for the opposition.
UK GDP grew by just 0.3% in Q1; on an annual basis the figure was 2.1%. That was below expectations and a worrying sign that the long-expected Brexit cliff is finally here.
One economist — Samuel Tombs of Pantheon Macroeconomics — believes the Tories could emerge with a majority of as few as 30 seats, rather than the 100 or more that many have predicted, because of the slowdown. If the economy continues on its current trajectory then it will be in a rough spot in 2020, the date of the previously scheduled election.
The EU will have pulled its trade ties with the UK. The pound will be in decline. The economy might be shrinking. No prime minister wants to go the country under those conditions. From that perspective, the economic data made May's decision for her — not the apparent weakness of Labour's poll ratings.
Here are the economic datapoints that will make this election much more stressful for May than you'd think.
House prices are going into decline. The long property boom that has made half the country feel like millionaires is coming to an end, according to Nationwide:
Nationwide / Pantheon Macroeconomics
HSBC UK Economist Liz Martins said in a recent note to clients that retail sales have taken a sudden dip. If you regard consumer spending as a "canary in the coalmine" for economic activity then this does not look good very good for Theresa May:
Consumer confidence peaked recently and is now trending down:
Pantheon's Tombs mapped that same data onto election data. There is a very rough relationship between consumer confidence and governments winning a general election. But notice that the line is starting to dip below the threshold that Tombs believes governments need to stay in power:
"The current health of the economy provides another reason to think the Conservatives aren't heading for a triple-digit majority," Tombs told his clients. "GfK's consumer confidence index stood at -6 in March, 10 points lower than a month before the general election in 2015. Based on historical experience, GfK's index points to a majority for the Conservatives of only about 30 seats."
Confidence is declining because pay growth is declining. People are feeling poorer as wages stall and prices rise (and prices are rising because Brexit caused the pound to decline), as this HSBC chart from Liz Martins shows:
The wages issue will bite harder, if this Pantheon chart is an indicator of the future. It shows that Pay As You Earn (PAYE) income tax receipts have started to decline. Tax data closely tracks wages and earnings data:
"In 2016/17, they [PAYE receipts] rose by just 2.1% and 2.6% year-over-year, respectively. What's more, the trend in both taxes has weakened over the last few months, as the blue and green bars on our chart above show. Indeed, income tax receipts fell by 3.5% year-over-year in March, while production taxes fell by 1.6%," Tombs says.
Tombs thinks May's new majority may be only 30 seats, and Martins thinks it might be as low as 50. Both numbers are way below the 100 being bandied about in the media. Here is Martins' comparison of polls vs majorities: "The polls suggest Mrs May will increase her majority from 17 to over 100. But even if it only increases to 50, it will still be a marked improvement on her current position from a political perspective":
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