The UK heads to the polls on 4 July, with predictions pointing to a sweeping Labour victory. This would mark the first Conservative-to-Labour transition in 27 years. Major political shifts in the UK have historically been followed by profound economic changes, and this occasion might be no different.
Rachel Reeves, who will become Chancellor of the Exchequer in a Labour government, has outlined a comprehensive framework for Labour’s economic policy, focusing on addressing Britain’s supply-side crisis and drawing parallels to current US strategic economic policies. Labour aims to play a long game, being tactical with borrowing and tax policies, while looking for policy levers to facilitate strategic, long-term investments to boost productivity, trade and energy security.
If Labour can make progress toward these goals, we believe investors should anticipate the British pound to reverse its weakening tren.
Reeves’ supply-side blueprint for Labour
In March, Reeves gave an important speech outlining a broad set of guiding principles for Labour’s economic policy agenda. Reeves’ argument is based on Labour’s views that Britain is facing a supply-side crisis caused by insufficient investment across almost every part of the public sphere. She also highlights policy instability, which she claims has led to business under-investment.
Reeves envisions a rise in global strategic resource competition, particularly in energy, and views the UK's current global trading frameworks as unfavorable. Drawing clear parallels to US strategic economic policy, especially regarding fostering investment in domestic production in key sectors, she argues that these issues have hindered productivity growth and are a key reason why real incomes have not grown as expected. This is a critical link to the foundational principles of the Labour party.
Sterling's decline and the path to recovery
The GBP/USD has experienced a prolonged decline against the dollar, driven by many of the factors highlighted in Reeves' analysis. Sterling depreciated meaningfully following the great financial crisis (GFC) and again after Brexit. It further weakened as the post-Brexit regime shifted away from a customs union toward a setup less favorable to the UK.
The exchange rate may partially reflect poor expectations for the UK's economic prospects. In our view, this creates a low bar and suggests there may be potential for improvement if Reeves' framework for enhancing growth, trade, incomes and energy security proves even modestly successful. The burden of proof lies with the next government, but it may benefit from favorable winds at its back. If polls are accurate, Labour will wield considerable political power.