Strategy & economics

Big societies challenge big governments

Chief Economist Richard Jeffrey considers the causes of the shock EU referendum and US election results.

07/04/2017

Richard Jeffrey

Richard Jeffrey

Chief Economist

What seems to connect the UK referendum and the US presidential election is the apparent willingness of electorates to reject the established order and take a step into the unknown. There have been similar moments of rejection in the past. The landslide vote for Labour in 1945 was one, though its cause was more obvious. And in 1970, the left-wing Labour politician Richard Crossman wrote: “There is a cracking sound in the political atmosphere: the sound of the consensus breaking up,” although this fracturing did not manifest until almost a decade later, with the election of Margaret Thatcher.

Disconnected politicians

What appears to have come together with so much force over the past year is a potent combination of political and economic influences on elector attitudes. These have brought about a distinct feeling of social ennui and disassociation from Westminster and Washington. Rightly or wrongly, the political classes have been judged to have become increasingly disconnected from the man and woman on the street. This, in itself, is nothing new – indeed, you could argue that it has been the case for most of history. What is new is the confidence that electors have shown in challenging the established order.

To a certain extent, modern media and communications may be responsible. The deficiencies of politicians are now continually exposed. Yet this still does not explain the risk that electorates took in 2016. Is it just that the disconnect between the common people and their political masters has become too extreme? In the referendum campaign, Nigel Farage addressed directly the concerns of many about the overarching influence of the EU. Likewise, Mr Trump developed a style that appealed to at least a proportion of the population. In both cases, the outcomes reflected the feeling of many people that their interests had been ignored for too long.

Workers aren’t benefiting

In themselves, these influences may have been enough for voters to reject the status quo. But there has been another source of dissatisfaction. Statistics tell us that the UK and US have enjoyed seven consecutive years of decent growth. UK households have seen an average annual gain of 1% in total real disposable income. However, this is not the whole story. Over the period, the numbers of people in employment and the number of households have both risen. So, whereas total wages and salaries have increased by 2.75% per annum in cash terms, the increase per employee has been about 1.75% – less than the inflation rate.

Weak productivity is not peculiar to the UK or US – it is more or less pervasive in advanced economies. It is my strong belief that the consequences for employee incomes have had a much greater impact on electoral mood than might have been realised. The inescapable conclusion is that most employees have not seen the benefits of growth slip into their pay packets. And it may not just be in the UK and US that the dissatisfaction of voters is starting to manifest. 

Author

Richard Jeffrey

Richard Jeffrey

Chief Economist

Richard Jeffrey is Chief Economist at Cazenove Capital and is responsible for the macro-economic framework that supports the investment process. He joined in 2008. Since completing a Master’s degree in Quantitative Economics, Richard has worked as a professional macroeconomist and market strategist. Richard has 37 years’ investment experience and appears frequently on radio and television and writes for a number of journals. He works with a number of think-tanks and academic organisations and currently sits on the Finance Committee of Bristol University.

This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

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