Why Gordon Brown won’t call an early election

Higher rates, higher mortgage payments, raised uncertainty and signs of a consumer slowdown... There are plenty of reasons for Gordon Brown to call a general election this autumn. But John Stepek doesn't think he will.

This feature is part of our FREE daily Money Morning email. If you'd like to sign up, please click here: Sign up for Money Morning

The Bank of England announces its latest interest rate decision today, and it's very likely to leave rates on hold at 5.75%.

Amid the gloom of the credit crunch, many analysts are now calling this the peak of the interest rate cycle - particularly in light of the Federal Reserve's drastic half-point rate cut last month.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

But as Jamie Chisholm points out in the FT this morning, only a month or so ago, most economists expected rates to rise once more, to 6%. On top of this, "there is little evidence yet [his emphasis] that the summer's shenanigans have derailed UK growth" and inflationary pressures remain clear in both manufacturing and service sector surveys published recently.

So those hoping for a cut any time soon may have a long wait on their hands

However, although inflationary pressures might make it harder for the Bank of England to cut rates, there is growing evidence that UK consumers are tightening their belts.

Retail tycoon Sir Philip Green, reported that profits at flagship chain BHS were almost flat, while underlying sales fell 1.5% for the year to March 2007.

"The summer for everybody in our industry was hard work and anybody who tells you different is a liar," he told the FT. "It was ugly it cost me a lot of money."

Sir Philip may be talking his book a little here after all, BHS is hardly the toast of the high street, while his former target M&S (MKS) is still the darling of the fashion world. But amid higher interest rates, higher mortgage payments, and raised levels of uncertainty, there's no denying that the outlook for the consumer is much wobblier than it has been for years.

All in all, there are plenty of good reasons for Gordon Brown to call an early election. As Clinton said, when it comes to elections, "It's the economy, stupid." The longer he leaves it, the more chance there is that things will go horribly wrong.

But for what it's worth, I don't think he'll call an early poll, for several reasons. For a start, Mr Brown has got lucky so far. The exceptionally benign economic environment of the past decade means that there is still no real popular understanding of just how significantly he has raised taxes, or how wastefully that money's been spent (see our May cover story on his record for more details: What Gordon Brown's premiership will mean for investors). None of the recent mud from the banking crisis has stuck to him.

He may expect that luck to continue - particularly now that Northern Rock is receding from the headlines. More to the point, I suspect Mr Brown believes that his economic policies are the right ones. Hes certainly not someone to admit hes wrong, as his stubborn insistence on sticking with the ludicrous tax credits system shows, and as his generally hostile reactions when questioned on his policies shows.

Yet if he calls an election now, he's pretty much admitting that he's worried he won't be able to win one later - otherwise, why go to the country mid-term? It's a bit like being up 1-0 at half-time in a football match, and then trying to get the referee to call the rest of the game off. He's already argued that there's no need for him to get a mandate from voters, so really, there's no justification for going to all the hassle and expense of an election, as Philip Johnston pointed out in The Telegraph a few days ago.

He'll probably keep us guessing right to the last moment - mainly to keep the Tories running around in circles panicking about the election rather than focusing on building some concrete policies or vision of the future. But in the end he won't go early. After all, as we saw from his years of glowering in Tony Blair's shadow, he's not one for taking risks. In fact, he may well keep putting it off and waiting for a better opportunity to go until he's forced to in 2010.

I could be wrong of course. But bear in mind that if he does call an early election, it's because he is so sure that life is going to be harder in a year's time than it is now, that's he's more willing to risk losing power early, than risk waiting to face the voters later. So an early election is a bad sign for the economy if he does call a November poll, I'd suggest raising up your gold holdings.

Moving on here's a conference that may well be of interest to readers of Money Morning. It's never easy to figure out where the best place is to put your money, and it's going to get harder amid the recent turmoil in the markets. But it's always good to get an expert opinion and you can hear more than 50 of them lining up to give you their share tips and profitable strategies at the World Money Show. The London leg of the conference is being held on 30 November - 1 December at The Queen Elizabeth II Conference Centre and will feature 14 panel presentations and leading investment product and service providers. Call today to register for The World Money Show London at 00 800 1414 8888 (international free phone) between 10.30 am -10.30 pm (EXCEPT from 28 October to 4 November when hours will be 9.30 am to 9.30 pm because of the daylight saving time difference). Don't forget to mention priority code #009184. Or just click here.

And just before we go, I just need to warn subscribers that unfortunately, due to the rather lengthy UK postal strike this week and next, there's a strong chance you won't get your copy of this week's issue of MoneyWeek delivered until well into next week. We're very sorry and none-too-happy ourselves about this - it's something that's completely beyond our control. However, you can download the latest issue as a PDF from our website, which may at least tide you over in the meantime. Feel free to give it a try with the current issue, and if you have any problems with downloading it, send me an email (johns@moneyweek.com) and I'll get our customer services team to help you out.

Turning to the wider markets

Enjoying this article? Why not sign up to receive Money Morning FREE every weekday? Just click here: FREE daily Money Morning email

In London, the FTSE 100 closed with modest gains - up 34 points at 6,535. Hopes of a rescue package for Northern Rock saw the mortgage bank add nearly 12% and it was also a good day for peer Alliance and Leicester. For a full market report, see: London market close

Elsewhere in Europe, the CAC-40 added 6 points to end the session at 5,806. And in Frankfurt, the DAX-30 was 8 points higher, at 7,955.

Across the Atlantic, technology stocks led the major indices lower. The Dow Jones ended the day 79 points lower, at 13,968, with Intel amongst the heaviest fallers. The tech-rich Nasdaq was down 17 points, at 2,729. And the S&P 500 lost a fraction of a point to close at 1,539.

In Asia, the Japanese Nikkei fell for the first time this week, ending the day down 107 points, at 17,092. And the Hang Seng was down by as much as 600 points to 26,872 at the time of writing.

Crude oil had fallen to $79.81 this morning and Brent spot down to $77.66 in London.

Spot gold fell to its lowest level for a week in Asia trading, hitting an intra-day low of $723.60 before edging back up to $725.60.

In the currency markets, the pound was at 2.0290 against the dollar and 1.4393 against the euro. And the dollar was at 0.7090 against the euro and 116.54 against the Japanese yen.

And in London this morning, a survey by HBOS revealed that UK house prices fell for the first time in nine months in September. The average house price was down 0.6% from August, although prices for the quarter ending in September were up by 10.7% on the period in 2006.

Are the bad times over for markets?

At first glance, it would appear that markets have recovered from the credit crunch. But some key sectors have been noticeably absent from the post-Fed rate cut euphoria - whilst some of the key indicators still signal weakness. For more on why the good times aren't back just yet, read: Are the bad times over for markets?

Is this the way to solve our water AND energy needs?

The sea may be the only source of the water needed to sustain a growing global population. But desalinisation processes eat up fossil fuels. However, Garry White has a solution which could kill two birds with one stone. To find out more about this new investment opportunity, click here: Is this the way to solve our water AND energy needs

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.