New age of austerity for the UK as Cameron takes No 10
Posted on 12 May 2010 with no comments from readers
New British Prime Minister David Cameron has formed a full coalition with the Liberal Democrats with a fixed five-year term of office, and key cabinet posts for his former opponents. What does it mean for Arabian investors? There is both good and bad news.
On the positive side the UK has averted a slide into chaos and a political crisis. There is a government with a program to tackle the record budget deficit. Mr Cameron is an attractive leader and his approach to the Liberal Democrats is commendable as by including as many of them as possible in his administration there will be less on the outside to cause trouble.
Poisoned chalice
But as the Governor of the Bank of England noted recently winning the UK election is a poisoned chalice as what needs to be done to turnaround the economy is going to make the person doing it deeply unpopular.
In 1979 Mrs Thatcher arrived at No 10 spouting the words of St Francis of Assisi but a couple of year later people were rioting on the streets with unemployment over three million. The austerity measures to be undertaken by Mr Cameron are going to be equally, if not more severe.
Higher taxes and lower public spending for many years are in prospect. This is deflationary and austere, and a return of much higher interest rates also has to come at some point. Turkeys have indeed voted for Christmas.
UK house prices
UK house prices will be a major casualty, and that is where most Britons will feel the impact on their wealth, although higher income tax payers will also pay a high price for the new government’s ‘fairness’. Economic contraction on the scale required to contain and reduce the UK budget deficit left over from the previous administration is just not good news for asset prices.
The London Stock Exchange and pound sterling will rally on the news that the uncertainty of a hung parliament has been resolved, at least for now. But this should be seen as a selling and not a buying opportunity. The buying opportunity is a couple of years away at the depths of the next recession.
For those readers who ask for a more upbeat assessment kindly blame the Bank of England for its pessimism as these conclusions are hardly unique.
