With a few seats still to declare, the Conservative vote share is slightly higher than the 36.1% achieved at the 2010 election and about 6 percentage points (pp) ahead of Labour. This compares with a 2 pp margin predicted by the economic model described in a previous post, based on current values of the input variables.
The difference between the actual 6 pp lead and the 2 pp prediction probably reflects two factors. First, the SNP increased its vote share by 3 pp, mostly at the expense of Labour. Secondly, voters appear to have given the Tories some credit for expected further economic improvements: the model had indicated that their lead would be 6 pp if the economic conditions forecast by the Bank of England for the fourth quarter of 2015 were in place now.
Eurozone March money numbers released last week showed further solid monthly gains in M1 and M3, supporting optimism about near-term economic prospects. The country detail, however, was the more interesting feature of the data.
In the big four economies, six-month growth of real M1 deposits* is now strongest in France – see first chart. Recent purchasing managers’ surveys have been much weaker in France than the rest of the Eurozone but the money pick-up suggests that economic news will surprise positively over coming months.
Spain had been topping the ranking but real M1 deposit growth has fallen since end-2014, though remains healthy. GDP rose by 0.7% and 0.9% respectively in the fourth and first quarters but gains may moderate ahead of the general election due by December.
In the three bailout economies, real narrow money trends remain strong in Ireland but have softened in Portugal while turning negative in Greece – second chart. As in Spain, the Portuguese slowdown may be relevant for parliamentary elections due in September-October. Greek real money growth had picked up in late 2014 and was being reflected in an economic recovery, which the confidence-sapping actions of the incoming Syriza-led government have aborted: the current recession cannot be blamed on externally-imposed “austerity”.
*M1 comprises notes / coins and overnight deposits. A country breakdown is available only for the latter.
UK monetary trends continue to give a reassuring message for economic prospects, though are less upbeat than Eurozone and US developments. Corporate liquidity, in particular, is rising fast, suggesting stronger investment and hiring after the election – providing that it delivers a stable, business-supportive government.
The favoured broad and narrow monetary aggregates here are non-financial M4 and M1, covering money holdings of households and private non-financial firms. M1 comprises notes / coin and sight deposits, with M4 adding in other deposits, repos and short-maturity bank paper. Money holdings of financial companies are volatile and less relevant for judging near-term economic prospects.
Real non-financial M1 (i.e. deflated by consumer prices) rose by a solid 3.9%, or 8.0% annualised, in the six months to March. Real non-financial M4 growth was lower but respectable at 2.8%, or 5.6% annualised. Both measures have strengthened since last summer, suggesting that the recent GDP slowdown, if confirmed, will prove temporary – see first chart.
Corporate liquidity is surging: real M4 holdings of private non-financial corporations rose by 5.7%, or 11.8% annualised, in the six months to March – the fastest since 2007, a strong year for business investment. Companies have ample resources to boost spending and expand their workforces but may be temporarily “hoarding” liquidity ahead of the election result.
Relatively sluggish household M4 growth partly reflects recent strong buying of National Savings pensioner bonds and probably has little implication for consumer spending. National Savings attracted £12.1 billion in the first quarter, a record quarterly total equivalent to 1.0% of the stock of household M4.
Monetary trends are less expansionary than in the Eurozone, where real non-financial M1 rose by 5.8%, or 12.0% annualised, in the six months to March – second chart. GDP probably grew by less than in the Eurozone in the first quarter and the UK may struggle to recapture a lead.
A caveat to the positive comments above is that recent solid real money growth owes much to temporarily low inflation. Unless nominal trends strengthen further, real money expansion will fall back during the second half as inflation rebounds, in turn implying slower economic momentum in 2016.
The best measure of US average wages is the quarterly employment cost index (ECI), which adjusts for job shifts between occupations and industries. Annual growth in ECI wages rose to 2.5% in the first quarter of 2015, the fastest since 2008. The historical relationship with the job openings or vacancies rate had signalled a pick-up and suggests a further increase – see first chart.
There is no ECI equivalent in the UK. Annual growth in average regular earnings, unadjusted for employment composition effects or weekly hours, rose to 2.2% in February, the fastest since 2011. As in the US, the historical relationship with the job openings rate suggests further strength – second chart.
The average earnings numbers are probably understating pay pressures, judging from survey evidence. The services labour costs index in the Bank of England agents’ survey, for example, is equal to its level in September 2008, when services earnings growth was over 3% – third chart.
Similarly, the current personal finances component of the EU Commission consumer confidence survey is at its strongest since 2008. The previous post argued that this component is a better guide to voter support for the governing party or parties than the overall confidence indicator. Its further rise last month, therefore, is hopeful news for the Conservatives / Liberal Democrats – fourth chart.
US / UK wage acceleration is not being matched by better productivity performance. Current data, indeed, suggest that output per hour fell in both economies in the first quarter. (The weak US result, however, was affected by bad weather and a ports strike, while the UK GDP slowdown is difficult to reconcile with other evidence and may be revised away.)
Global monetary trends are signalling a rebound in growth in the second half after a recent soft patch. Consumer price rises, meanwhile, are normalising after a temporary drag from last year’s oil price slump. Against this backdrop, the Fed and Bank of England cannot ignore clear evidence of rising unit labour cost pressures. The recent firming of US and UK market interest rate expectations is warranted and may extend.
British electors, on the face of it, are an ungrateful bunch. Consumer confidence, as measured by the EU Commission / GfK monthly indicator, is at the top of its range over the last 40 years – in the 96th percentile, to be precise, up from the 44th just before the May 2010 general election. The governing Conservative and Liberal Democrat parties, however, command the support of only 42% of voters, according to the poll of polls compiled by ukpollingreport.com, down from a 59% share at the last election.
Mismatches between consumer confidence and government popularity, in fact, are nothing new. The party of government has changed in elections four times since the early 1970s: February 1974 (Conservative to Labour), May 1979 (Conservative win), May 1997 (Labour win) and May 2010 (Conservative- Liberal Democrat coalition). Consumer confidence was also at the top of its range in 1979 and 1997, standing in the 96th and 95th percentiles respectively – see first chart. (Confidence had slumped during the 1978-79 “winter of discontent” but rebounded strongly into the election.)
It would be wrong to conclude that economic / financial factors are of little importance to voters. Statistical research reported in previous posts (e.g. here) shows that the poll difference between the main governing and opposition parties depends positively on average earnings growth and house price inflation, and negatively on interest rates, consumer price inflation and the unemployment rate. A model based on these factors explains a significant portion of historical poll variation and continues to suggest a small Conservative lead over Labour on 7 May.
Consumer confidence is an inferior political guide probably for two reasons. First, the confidence indicator is a forward-looking measure: it combines consumers’ expectations of their finances, saving behaviour, the economy and unemployment over the next 12 months. Voters, however, appear to rate governments on what they have delivered to date, discounting promised improvement, even when this is believed.
Secondly, earnings growth is much more important for voting intentions than other influences on confidence. The statistical research indicates that a 1 percentage point (pp) rise in earnings growth moves the poll gap by 4 pp in favour of the governing party; a 1 pp fall in consumer price inflation or the unemployment rate, by contrast, delivers a boost of only 1 pp. (Changes in interest rates also have a significant impact, explaining why governments and their central bank appointees try so hard to hold rates down before elections.)
These considerations suggest that political analysts should focus attention on the component of the consumer survey tracking current personal finances rather than the broader and forward-looking confidence measure. This component has lagged the pick-up in confidence, currently standing in the 70th percentile of its historical range. It is, however, rising fast, regaining its 2008 pre-recession level in March – second chart.
The Bank of England forecasts a rise in earnings growth to 3.5% in the fourth quarter of 2015, from 1.7% in the three months to February. The polling model suggests that the Conservative lead over Labour would be 6 pp if such growth was occurring now. Tory-supporting business leaders are increasingly frustrated by the lack of traction of the party’s election campaign, according to today’s Financial Times. Have they considered the impact of their own wage policies on the electoral arithmetic?