Ask any type of city why the UK appeals as an investment destination and they are likely to mention the rule of law, respect for property rights and no corruption.
Until recently, political stability could also be on the list. But the UK has had its fourth major poll in less than four years – and smart money says there will be another before long after Parliament was suspended last week.
To put that in context, we have had more elections lately than the four most volatile countries in the world: Maldives, Mauritania, Algeria and Ethiopia.
But other than sending Brenda from Bristol into another stroke, what impact does it all have on the economy? Everyone hears the same old talking heads trotting lines in financial markets “hating uncertainty,” but the millions of consumers and small businesses that make up our economy aren’t crazy either.
Three American academics, Scott Baker, Nicholas Bloom and Steven Davis, set out to measure the impact of uncertainty on growth and their results, published last year, were quite alarming.
Academics constructed an Economic Policy Uncertainty Index (UPR) by analyzing more than 12,000 newspaper articles in the United States from 1985 for the words “uncertainty” and “economy” and political terms such as ” deficit ”,“ Federal Reserve ”and“ legislation ”.
What they found was that their index peaks between 2005 and 2012 pointed to average declines of around 6% in investment, over 1% in industrial production and 0.4%. employment.
While the results were “not necessarily causal,” they said a “plausible interpretation” was that political uncertainty “delays investment, hiring and growth in policy-sensitive sectors like defense, finance, health and construction, and these sectors are large enough for political uncertainty to matter at the aggregate level ”.
Bloom published another article this month that looked at option prices at more than 4,000 companies over a 20-year period. He revealed that the main drivers of long-term uncertainty were political doubts, compared, for example, to changes in the price of oil, which were the main source of short-term fluctuations.
Its results revealed that research and development spending was the biggest victim of long-term uncertainty, followed by investment, then hiring.
So where does all this leave the UK? Not in great shape according to Bloom, who as a Stanford economics professor has a reasonable claim to know these things.
He said to me, “This is going to hold back long-term productivity growth in particular. Long-term uncertainty – the kind we have now after elections – is particularly damaging to R&D. So the crisis of low productivity growth in Britain has only worsened a bit. ”
He believes that the UK’s EPU index for the elections “will jump massively” and is “very confident that a group of companies will suspend their investments until the outlook is a little more certain”.
Consider just one of the thousands of examples that could deter a company from spending on investment for the time being when the Brexit clock is ticking and there is no proper government to speak of. A House of Lords report released in March on post-Brexit trade cited witnesses saying the number of customs declarations may have to reach around 350 million per year. HMRC is currently only ready to handle around 100 million.
Whatever trade deals we have left, additional costs are likely to be passed on to businesses. It certainly doesn’t justify spending money on your business with a new factory, computer system, or whatever.
There’s a school of thought that says it’s good news for the UK to have a lame Prime Minister who can’t do anything, because at least that keeps him from doing any harm. I don’t buy it. The vote simply put the most anti-business Labor Party in 30 years into serious electoral controversy.
Who will dare to invest, especially in a context of inflation which slows growth as time is running ruthlessly until March 2019? All in all, the Conservatives’ disastrous campaign could cost us dearly.