The Corbyn effect

What’s wrong with UK financial markets? The global economy is recovering, but British stocks and shares are not keeping pace. The pound has failed to recover from the slide it experienced in the wake of the EU referendum. This is frequently blamed on investors being spooked by Brexit, even more so by the possibility of a no deal. But has anyone actually asked the markets what is spooking them? Look closer and it becomes clear that while Brexit is a problem for some investors, most are much more worried about a far bigger risk, even if they rarely speak about it in public. It is the possibility of a Corbyn government.

Since last year’s election, when the Labour leader came within a stone’s throw of No. 10, it has been impossible to write off the idea of a Corbyn victory. And we’re about to enter a time when anything can happen. Theresa May looks doomed to lose the Commons vote on her Brexit deal on 11 December; the DUP has said it may well withdraw its support from the Tories, leaving the Prime Minister without a majority. Whatever the Commons result, turmoil is more or less guaranteed — and one possible outcome is a general election as early as January.

A no-deal Brexit would unquestionably cause short-term ructions in the UK economy, as well as affect the pound and the FTSE — for what economic forecasts are worth (which is not very much, to judge by recent history). Oxford Economics recently claimed that GDP would be 2 per cent smaller than expected, pushing the UK into a mild recession. But even if that were to happen (and it has to be remembered just how far Treasury forecasts were out when they claimed the economy would shrink by 3.6 and 6 per cent in the event of a Brexit vote), growth would then rekindle, trade would continue, companies would re-route imports and exports, and an inflationary spike would die down.