Elections (UK), Elections (Mexico) and Elections (South Africa)

31 May 2024

Executive summary

This week we look at the economic consequences of three electoral moments: : 

  • UK elections: What would a return to Labour mean for the economy? The general elections on 04 July could bring back the Labour party after 14 years of Tory rule. We expect that under such a scenario, pragmatism and fiscal discipline should take precedence over higher public investments. In other words, based on electoral pledges, the Labour government is expected to increase green investments by around GBP5bn in (five times less than initially planned) and additional NHS spending by GBP1.1bn, leading together with other measures to a modest additional fiscal consolidation of GBP20bn (0.7% of GDP) by 2028. However, should they decide to revert back to their initial program, the fiscal shortfall could rise to 3% of GDP, needing more than GBP70bn in fiscal consolidation. Stepped up plans to control immigration and implement further labor protections could take growth to a trough of +0.7% in 2026, less than half of what it would have been under the baseline scenario, while inflation would stay above 3% as the sterling would depreciate by -7% to -10%.
  • Mexico elections: Fiscal and trade policies under scrutiny.  The 02 June general elections are expected to result in policy continuity, with Claudia Sheinbaum poised to succeed President López Obrador. However, markets will scrutinize two main risks. First, the upcoming fiscal and budgetary plans as the primary deficit increased to -1.1% of GDP. The central bank is likely to proceed with a modest reduction in interest rates in H2 (-50bps to 10.5%) as inflation remains slightly above the 4% target. Public debt stands at 53% of GDP, with risks of rising by +5pps this year due to Pemex's financial strain and increased social spending. Second, the US political landscape after the November Presidential elections will be crucial for its knock-on effects on Mexico’s economy. While Mexico is likely to be spared from punitive US tariff measures, the economy would suffer from the second-round effects of a trade war between the US and China/the EU with GDP growth cut by -0.3pp after two years and exports by -1.4pp.
  • South Africa elections: Rising political fragmentation. The African National Congress (ANC) will need to form a coalition to govern for the first time in 30 years. This fragmentation is likely to increase public debt servicing costs from an already high 5% of GDP. The policy rate has remained 2-3pps over inflation for a year now, shielding the ZAR against excessive volatility. We expect the policy rate to decrease by -50bps by year-end to 7.75%. While the primary fiscal balance is slightly in surplus since 2023, the political fragmentation will limit the strength of future public spending increases, notably as the net gold and foreign exchange contingency account is estimated at +2% of GDP. Overall, we expect GDP growth at +1.4% in 2024, mainly driven by the rebound in global trade.

Ludovic Subran

Allianz SE

Luca Moneta

Allianz Trade

Nikhil Sebastian

Allianz Trade

Maxime Darmet

Allianz Trade