The UK economy has found itself on more solid footing as the country heads to the ballot box, but a tentatively rosier outlook may do little to tip the scales in favor of the governing Conservative Party.

The UK's general election will take place July 4 against a backdrop of divergent economic signals. The country has made headway on inflation and rebounded from a mild recession but is simultaneously confronting a slew of long-standing problems, such as its ailing labor productivity and generally weak economic growth.

Recent positive indications, in addition to pledged tax cuts, are unlikely to sway a sufficient number of voters to keep Prime Minister Rishi Sunak's Conservative Party in power, with the opposition Labour Party leading in preelection polls.

Voters unpersuaded

UK GDP grew 0.6% in the first quarter of 2024, following two successive quarters of contraction, according to data published by the country's Office for National Statistics (ONS). The country also attained the Bank of England's 2% inflation target in May for the first time in nearly three years after peaking at 11.1% in October 2022, according to ONS data.

Still, voters' outlook on the economy remains decidedly dreary. Only 22% of Britons perceived their country's economy as being in good shape, according to a June survey conducted by the Pew Research Center.

The potential for tax increases and cuts to public spending post-election may be key contributing factors to voters' dampened spirits.

"Neither party [Conservative or Labour] is planning to top up total public service spending by enough to avoid very difficult choices for many public services in the next parliament," Bee Boileau, research economist at the Institute for Fiscal Studies, said in a June 23 press release. "But the [parties'] manifestos provided no information on which areas would actually bear the brunt of these choices, continuing the main parties' conspiracy of silence when it comes to public service spending plans."

No change to interest rates

The Bank of England (BoE) sidestepped an interest rate cut at its most recent Monetary Policy Committee meeting on June 20, avoiding a move that could have improved the Conservatives' standing among UK voters.

The central bank voted to keep its interest rate unchanged at 5.25%, a 16-year high, definitively ending speculation that a rate cut could offer a boost to the Conservative Party, which trails the Labour Party deeply in the polls.

"There was a view out there among some investors that the Bank wouldn't cut in an election campaign," said James Smith, a developed markets economist with ING, told S&P Global Market Intelligence. "I don't think that's necessarily true, but it's a moot point anyway because the higher-than-expected services inflation data had already written off [an interest rate] move."

Still, the possibility of a rate cut so close to the July 4 election may have been enough to get some undecided members of the BoE's Monetary Policy Committee to vote against a cut, said Raj Badiani, an economics director specializing in Europe at S&P Global Market Intelligence.

"A rate cut could have been interpreted as a politicized move, particularly with the data still not in place to support the start of the loosening cycle," Badiani said. "Specifically, the data continue to show a fragmented inflation picture, with persistently elevated service inflation being stoked by the continued pass-through of robust earnings growth."

A rate cut would have helped the Conservatives' case that their economic plan is working, though it likely would not have been a "game changer," Badiani said.

"The damage to the Conservatives' economic competence from ex-prime minister [Liz] Truss' ill-received tax-cutting budget in September 2022 lingers like a bad smell," Badiani said.

ING's Smith said the impact of the election will have little impact on the BoE since the Labour Party is not promising major tax or spending changes.

The European Central Bank on June 6 cut its benchmark rate to 3.75% from a record-high 4%, but the US Federal Reserve at its June meeting held its benchmark rate above 5%, where it has been since July 2023, and it is not expected to cut until September at the earliest.

Despite the "complicated signal for policy" stemming from higher services inflation data in May, a first rate cut could be expected from the BoE in August, Barclays analysts wrote in a June 21 note.