First Person: Hanging on the result

With just a few points separating the Conservative and Labour parties in UK general election polling, the prospect of a hung parliament - and economic paralysis - remains a distinct possibility. Yet history suggests that if it happens, the City will find a way to cope and may even prosper, writes new Review columnist Anthony Hilton

The City is well used to political risk. People who invest in less-developed markets routinely take into account the idea that business conditions might be abruptly altered, or the value of an investment undermined by a change of government. 

But not in the UK. The nation's people might not like a particular government, but rarely do they have doubts about the stability and predictability of the system as a whole. 

That is what makes 2015 so intriguing. Although the Conservative Party currently holds a narrow lead in the polls, it's hard to predict which party will come out on top. Any subsequent government could be the result of a coalition, an alliance or some behind-the-scenes horse trading. For the first time in decades, the outcome is totally unpredictable.

About our new columnist
Anthony Hilton (pictured) is an author, broadcaster, journalist and lecturer. He regularly contributes to the London Evening Standard on topics such as marketing, investor relations, pensions and economics.

Anthony has enjoyed a long and distinguished career as a financial journalist since joining Fleet Street in 1968 as a trainee on The Guardian. He has worked as City Editor of The Times and the London Evening Standard, and was Business Correspondent for The Sunday Times in New York.

He has also worked for The Observer, the Daily Mail and the Sunday Express, and was Editor of Accountancy Age for five years.

Anthony has received numerous industry awards for business journalism, including the Decade of Excellence award and the Wincott Prize for Business Journalism in 2003.

He will be writing his First Person column in both the print and digital editions of the Review throughout the year.
Markets hate uncertainty and it is beginning to take its toll. Even people who routinely complain about the quality of government decisions seem unnerved by the idea of a hung parliament that is unable to make any decisions at all.

History repeating?So time for some reassurance. We have been here before: back in the 1970s, when the governing Labour Party had little or no clear majority for five years. It was a time fraught with economic difficulty, but this was not the result of minority government and, given the scale of the challenges, it actually worked reasonably well. 

The political uncertainty began in March 1974. Having imposed a three-day week on the country to conserve electricity supplies in the face of a miners' strike, Conservative Prime Minister Ted Heath then called an early election to win backing for continuing the confrontation. He failed to get it. The Conservatives remained the largest party but lost their overall majority. In a weekend of fraught negotiations, Heath failed to persuade either the Liberals or the Ulster Unionists to support him. 

Harold Wilson's Labour Party formed a minority government. It promptly settled the strike - by meeting the miners' wage demands - and ended the three-day week.

However, the economy remained in a mess. The Heath Government had initiated a credit boom which delivered growth of 4% in 1972 but ran out of control and by 1974, the economy was in recession. A credit-induced boom and bust in the property sector brought about a banking crash - the fringe banking crisis - and a sector-wide Bank of England rescue.

There was trouble abroad too. The cost of the Vietnam War in 1972 forced US President Richard Nixon to devalue the dollar against gold. This brought to an end the system of fixed exchange rates that had prevailed since 1945. People had to learn to live with floating currencies. Then, in 1973, OPEC flexed its muscles for the first time and the price of oil quadrupled.

Major slump All this caused recession and inflation which soared to more than 20%. Mortgage rates rose to 18% and house prices crashed. The stock market, which had been booming, lost 70% of its value between 1972 and 1974, while the pound lost a quarter of its value against the dollar. But, interestingly, almost all of this damage was done before the UK had the minority government. Labour inherited the problems; it did not cause them.
"It was not a great time to be a financier, but it was manageable"After six months, Labour called another election for October 1974, hoping for a proper majority to tackle the country's problems. But it gained only 20 seats: enough for an overall majority of just three.

Given that a handful of MPs would be in hospital or abroad and unable to vote at any one time, it was for most practical purposes still a minority government. Then, after a couple of by-election defeats, its minority status was official. But it continued to govern with ad hoc support from the Liberals, Scottish nationalists and Irish unionists, none of whom wanted another election. Broadly speaking, Britain functioned for five years from 1974 to 1979 with a minority government.

Initially the City was positive. The bear market ended and share prices doubled in the first four months of 1975. But the huge inflation created by the oil shock made it impossible to sell fixed-interest gilts and eventually brought about a near collapse in government finances. This led to the International Monetary Fund rescue loans of 1976, the condition of which was a Greek-style austerity package, which, weak though it was, the Government pushed through. It then went on to persuade the powerful trade unions to accept pay policies that brought inflation down from 26% to 10%. Growth returned and the economy slowly recovered.

It was not much fun in the City at that time. After the initial surge, the market rose only slowly, there were few takeovers, a lot of inflation-induced bankruptcy, and not many growing companies. But there was also a lot of innovation, with the 1970s seeing the beginnings of the Eurobond markets, the financing of the development of North Sea oil and the invention of financial futures. It was not a great time to be a financier, but it was manageable. And the real lesson is that people adapted then, just as they will again if they have to do so this year.

Look out for Anthony Hilton's First Person column in the March 2015 print edition of The Review.
Published: 17 Feb 2015
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