How markets have reacted to a Labour government.

Last Friday, Sir Keir Starmer’s Labour party returned to Government for the first time in 14 years with a landslide election victory.

Labour secured over 400 seats – a result reflecting a shift in the political landscape, with smaller parties and independents also gaining notable support.

In Labour’s manifesto, notable fiscal commitments included maintaining the pensions triple lock and avoiding increases in the three main taxes, but what can we take from the financial markets and any long-term economic implications?

How did the markets react to the result?

There was very little movement overall, mainly because the expectation was for a Labour win. Asset markets are forward looking, therefore a Labour win was “priced in”.

Over the long term, the key drivers of asset markets include direction of interest rates, inflation, economic growth and underlying company fundamentals. Without a shock result, there can often be little change.

Bond markets showed minimal reaction, with 10-year gilt yields barely changing, staying around 4.2%.

The Pound to US Dollar exchange rate climbed to a three-week high last week. GBP strengthened by around 0.2% against USD and UK equities were marginally up around 0.2%. Earlier this week, the pound ranged above 1.2800 against the US Dollar. 

Can we expect to see an impact on mortgages?

A decisive majority result for the Labour government can be a positive for the property and financial markets, as opposed to the instability that could have been brought on with a hung parliament.

In their manifesto, the new government pledged to “get Britain building again,” with 1.5 million new homes over the next parliament. Their aim is also to keep mortgage rates low and help first-time buyers.

Mortgage rates started this year on a downward trajectory, with markets having dramatically increased expectations of base rate cuts, though swiftly reversing in spring. Around 1.6 million fixed rate mortgages are due to end this year, according to UK Finance.*

They are set by lenders and influenced by multiple factors – including the Bank of England base rate of interest. The Bank of England is independent of the government and its main role is to keep inflation stable at 2%.

Freedom to Buy – the revamped version of the Mortgage Guarantee Scheme – was Labour’s stand-out pledge for first-time buyers.

While the party’s housing and economic policies aim to aid first-time buyers, the impact may depend on the market’s perception – alongside the successful policy implementation. In the lead up to the general election, house prices increased in June but at a slower pace than the previous months, the latest data from Nationwide revealed.*

What to expect from Labour’s tax policies and public spending.

In their manifesto, the party confirmed that they would not be raising the three main forms of taxes: Income Tax, National Insurance Contributions (NICs), and VAT.

There has also been no indication of changes to Capital Gains Tax.

However, the new government has hinted at potential tax hikes for specific groups, including non-doms and private schools.

Private schools in the UK are VAT exempt, meaning that they do not have to charge 20% VAT on the school fees parents pay. Labour’s manifesto estimates the revenue from applying VAT and business rates to private schools as just over £1.5 billion.

Labour also proposed ending private schools’ exemption from paying business rates.

Public spending is expected to focus on key areas like economic growth, clean energy, and healthcare, with a Budget likely to take place in the Autumn. Forecasts from the Office for Budget Responsibility take 10 weeks to draw up, meaning we won’t see anything before mid-September.

What could be the long-term economic implications?

The economic implications of Labour’s victory hinge on the ability to implement their policies, with pledges across the economy, NHS, education, crime, clean energy and more key to delivering on their long-term plan – alongside a focus on productivity and growth.

UK GDP in Q1, 2024 was 1.8% above its pre-pandemic level of Q4, 2019. This compares with Eurozone GDP being 3.4% higher, with GDP in Germany up by 0.3%. The OECD forecasts UK GDP to grow by 0.4% in 2024 and by 1.0% in 2025.

Success may also depend on effective fiscal management and the ability to maintain investor confidence. We’ll hear more about the government’s approach to specific taxation and public spending, with their first Budget likely to give an idea of any major changes.

There’s a lot that we’ll be keeping an eye on over the coming months, so make sure you’re subscribed to our YouTube channel so you don’t miss our regular Do More With Your Money podcasts.

If you’re a True Potential Wealth Management client and have any queries, you can speak to one of our financial advisors or call our Relationship Management Team on 0191 500 9164. They’re available 7am-8pm on weekdays and 8am-12pm on Saturdays.

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Tax rules can change at any time. Tax treatment depends on an individual’s circumstances and may be subject to change in the future. Pension eligibility and tax rules apply.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. This material is not a personal recommendation or financial advice and the investments referred to may not be suitable for all investors.

 

Sources up to date and accessed on 10/07/24

*https://www.whatmortgage.co.uk/property-market/house-prices-inch-up-in-june-by-02-but-market-remains-flat/

*https://www.ukfinance.org.uk/news-and-insight/press-release/uk-finance-mortgage-data

https://labour.org.uk/change/labours-fiscal-plan/

https://commonslibrary.parliament.uk/research-briefings/sn02784/#:~:text=GDP%20growth%20in%20recent%20years,over%20this%20period%20at%208.7%25

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