UK election 2015: it’s going to be messy

If you are interested in the likely outcome of the UK general election on 7 May, then I can’t recommend highly enough the team at www.electionforecast.co.uk They are working with the US statistician Nate Silver (http://fivethirtyeight.com/) who is now widely regarded as the best at interpreting US election polls (and indeed all things statistical). The UK team update their probabilities daily, based on new information from polls, and combine it with a range of historical data. Here are their latest calculations: uk election 7 april Remembering that in the UK you need at least 326 seats to govern, you can see that we are likely in for a big mess if things don’t change much over the course of the next month. The likely coalitions currently show none having enough seats to get over the line (broad Cons coalition gets closes):

  • Cons/Lib Dem: 314
  • Cons/Lib Dem/DUP/UKIP: 323
  • Lab/Lib Dem: 298
  • Lab/Lib Dem/SDLP/Greens: 302

Labour and the SNP have said that they won’t enter into a formal coalition (although they could obviously change their minds on this). But the SNP have said they would support Labour in a minority govt. But that still wouldn’t be enough by itself to get Labour over the line (313) unless the Lib Dems also support them in a minority govt. Bottom line: unless either the Conservatives or Labour have a strong finish into 7 May, it is going to be messy. A few other points:

  1. It is striking how poorly UKIP do in this analysis in terms of likely number of seats. Despite being expected to get 10% of the national vote, they only win one seat! The SNP on the other hand are expected to get just 3.4% of the national vote, but for that to translate into 42 seats! First past the post voting can give some bizarre outcomes.
  2. I am currently holidaying in Germany, where there has been a long (modern) history of coalition governments. Indeed the current arrangement is a “Grand Coalition” of the two major parties, the CDU and SDP (equivalently the Conservatives and Labour in the UK). Could the UK political parities ever agree to such a grand coalition? It’s never happened outside of wartime, I don’t expect it will in 2015.
  3. Does any of this matter for markets? There are plenty who think that the uncertainty will negatively hit sterling. If it takes weeks rather than days for some sort of coalition to be agreed, then it seems reasonable to expect a hit to confidence. In terms of my own trades, that is a risk to my view on short sterling (see here), but I think a manageable given the type of trade.
  4. For all the rhetoric, I’m not sure the platforms of the major parties are sufficiently different to have a meaningfully different economic outcome. Sadly neither are spending enough time talking about the supply-side reforms needed in the UK to boost productivity growth.

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