Will the economy help Sunak at the next election?

A year of stagflation beckons but 2024 could see signs of economic recovery, says Sean O’Grady

High streets are being hammered by high inflation but Rishi Sunak may see the economic gloom lift next year (PA)

Downbeat economic data from the IMF (International Monetary Fund) and ONS (Office for National Statistics) this week, and some cautious remarks from the Bank of England about the safety of bank deposits, have raised doubts about whether the UK economy is headed for recovery, and with it the electoral prospects of the Conservatives.

The question is how well Rishi Sunak and Jeremy Hunt can align the electoral and economic cycles, and engineer a “boomlet” and tax cuts in time for polling day.

What’s the bad news?

The economy will do badly this year, both by historical standards and by comparison with other advanced economies. The UK may do better than was feared last autumn, after the disastrous “dash for growth” under Liz Truss and Kwasi Kwarteng, and it may avoid a technical recession (two successive quarters of negative growth).

However, it will be bouncing along the bottom, and will probably end up only marginally bigger or smaller than it was in 2022. A smaller pie, in other words. Meanwhile, taxes, interest rates and prices are still going up, and wages are not keeping pace.

What’s the good news?

Some sectors, such as retail and construction, are holding up well. Unemployment remains low, and wage growth in the private sector isn’t falling as far behind prices as it is in the public services. There hasn’t been a house-price crash, and there is a calmer mood in the markets.

However, tangible improvements will have to wait until early next year. That’s the point at which progress on Sunak’s undemanding economic tests on halving inflation, getting back to growth and reducing public debt can be judged. (“Stopping the boats” is a tougher proposition, as is cutting NHS waiting lists).

How are voters feeling?

The polls speak for themselves. Labour has something like a 15- to 20-point lead, and consumer confidence is fragile. People feel poorer, and many of them are, with highly visible and painful hikes in energy bills, rents, and fuel and food prices, coupled with low-ish pay settlements.

Public services haven’t been performing well, and the widespread industrial action has added to the mood of decay and disarray, a feeling of malaise that things aren’t working. Whatever the excuses, or truth, this will inevitably hurt a government that is seeking to project an image of control and national contentment.

The local elections in three weeks will offer a more definitive verdict and probably a drubbing for the Conservatives – but the pattern of voting may well reveal some reasons for hope. For example, the Tories may hold up better than expected in red-wall seats in the Midlands and the North, even as the South deserts them.

Although Scottish voters won’t be voting this Spring, they seem likely to defect from the SNP in due course, albeit mostly to Labour rather than the Tories.

Will things be better next year?

Yes, and increasingly so as the year goes on, and the further the current wave of strikes and the squeeze on living standards recede into the distance. Unless there is another doubling of energy and food costs, the annual rate of inflation will necessarily subside, just as a statistical artefact.

A rough economic agenda for next year would feature tax cuts and selected spending increases in a March Budget, with public-sector pay and “levelling up” schemes in marginal seats offering voters the hope that their recent hardships have not been in vain.

During 2024, if all goes to plan, inflation should be much nearer to the official target of 2 per cent, and the Bank of England in a position to edge interest rates, and thus mortgage bills and business borrowing costs, lower as the year goes on.

Unemployment should start to lower again, but the hope is that this won’t trigger a resurgence in wage inflation. Living standards should improve, albeit marginally, and the “feelgood factor” should drive consumer and business confidence higher. At that juncture, the idea is that disaffected Tory voters who’ve not yet defected to Labour can be enticed back.

Can the Tories persuade the voters to give them another term when the election arrives?

It’ll be an uphill struggle, but this narrative of tough decisions and sacrifices followed by economic reward is the best that Sunak and Hunt have got. “Recovery” and competence will be the themes, as well as the traditional Tory plea of “Don’t let Labour ruin it.”

Local elections in May 2024 will mark a crucial test of the government’s standing, alongside national opinion polls, and a strong showing might persuade Sunak to go to the country earlier than the (reported) current working assumption of a general election in the autumn. Theoretically, he could postpone facing the electorate until early 2025, but he might not be thanked for another winter election.

As have leaders of many previous governments approaching the end of a parliament, Sunak will have to balance the risks of going earlier, to capitalise on a modest (and incomplete) recovery in fortunes, and taking a calculated gamble, waiting for a further improvement in the economic and political mood, and setting a polling date in, say, October as the good news piles up. Of course, events can upset such plans.

What is also as yet unclear is how far the public are prepared to treat this administration as truly “new”, and ignore (or forget) that the party has been in power since 2010. It means airbrushing David Cameron, Theresa May, Boris Johnson and Truss from history, and glossing over the less-than-popular features of the past 13 years, including austerity, cuts, Brexit, the Covid response, Partygate, the Kwarteng mini-Budget, various sleaze scandals and much else.

The call of “Time for change” may prove irresistible in the end, as it did after previous long periods of Tory hegemony, in 1997 and 1964. Those two elections also followed parliamentary terms that went the full five years, by the way.