Hung Economy?

In the aftermath of the election which has produced no clear winner and left quite a lot of power on the table to be negotiated with, it was certainly not good news for the UK’s economy. The road to recovery after the recession has been a slow and bumpy one with the Greek crisis already creating uncertainty in people’s minds, putting the Euro in danger. Investors all around the world had been hoping for a decisive winner in the election; however, after the Tories were unable to secure an outright majority in the House of Commons, the lack of a decisive winner will almost certainly hit investor confidence, at least in the short term. We have already seen the beginnings of it, as political uncertainty saw the pound fall against the euro to 1.15 and to a year-low 1.447 against the dollar.

What are the reasons for this? Why does a hung parliament spell out danger for an economy, especially as fragile as the UK? Almost all economists agree that for a strong economy, a strong and stable government is needed. However, with a hung parliament, there are fears that there would be insufficient agreements to make the tough political choices necessary to cut the public spending, when UK’s budget deficit has hit a record £152 billion, which is 11% of the GDP. Therefore, investors will be worried that a weak government will be unable to force through measures to reduce the UK's high borrowing levels. The longer the current uncertainty continues regarding whether we see a Conservative-Lib Dem coalition or a Labour-Lib Dem coalition, the longer the delay will be in the recovery process which can greatly jeopardise the future of the UK economy.

Furthermore, the weakness of the pound has sparked inflation fears, as well as factory gate prices rising at their fastest pace for 18 months. The situation is not helped by the fact that all three parties have differing views over how to tackle the biggest problems of it all: the Budget Deficit. Whilst the Conservatives plan on cutting borrowing this year, the Liberal Democrats say that cutting borrowing now would slow down the economic recovery, and want extra resources for the treasury by putting tax rises in place.

Nevertheless, it is likely that there will be some sort of decision by Monday as to which side the Liberal Democrats will be joining, which will come as welcome news for the investors and the markets. But for now, the markets remain anxious, eagerly awaiting the definitive attitude needed to put our recovery back on track.