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Labour or the Conservatives? Either way, the economy is in trouble, says Deutsche Bank

'Growth will have to navigate the Scylla and Charybdis of fiscal tightening and less accommodative monetary policy whatever government takes office,' bank says in research on 2015 general election

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Both parties are committed to reducing the deficit, and without QE, the effect on demand will be felt, says Deutsche Bank Photo: PA









By James Titcomb

3:22PM GMT 09 Jan 2015

115 Comments


What outcome to May’s General Election should investors be hoping for? Well, according to Europe’s biggest investment bank, it doesn’t matter – you’ll be feeling the pain either way.

In a research note released on Friday, Deutsche Bank said asset prices would be threatened by either a Labour or a Conservative government.


“For investors, there may be no good outcomes at this general election,” said Deutsche’s Oliver Harvey and George Buckley. “It is likely that growth will have to navigate the Scylla and Charybdis of fiscal tightening and less accommodative monetary policy whatever government takes office.”


Austerity after the election is inevitable regardless of the outcome, according to Deutsche, and will be particularly painful without a quantitative easing programme from the Bank of England to help prop up investments this time round.


Cuts following the 2010 election were accompanied by £175bn of QE in 2011 and 2012, while interest rates had been cut to a record 0.5pc. With a rate increase from the Bank of England coming this year or next, deficit reduction could have a much bigger effect.

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“The last round of fiscal austerity was at least partially offset by full-scale QE from the Bank of England. If politics were to prevent a credible fiscal programme, the size of the deficit could result in a rise in risk premia and higher borrowing costs,” Deutsche said.

"Future austerity will be taking place against a very different policy backdrop from the past five years. In 2010, the impact of austerity on demand was at least partially mitigated by expansionary monetary policy."

A Labour minority government or a Labour-Liberal Democrat coalition are the most likely outcomes, with a Labour-SNP coalition also very possible, according to Mr Harvey and Mr Buckley.

While this would mean a slower programme of deficit reduction, corporate and personal tax rises would put off foreign investment in the UK, threatening the (already record high) current account deficit, and devaluing sterling.

Bigger circles represent a higher likelihood (Deutsche Bank)
A Labour coalition with the SNP, meanwhile, would mean more powers for Scotland, and potentially put the issue of Scottish independence back on the agenda – and we all saw what investors did in the run-up to September’s referendum.
Deutsche Bank says a Conservative government, meanwhile, would by no means be easy going for investors.

An in-out EU referendum could “rattle investor confidence”, and a Tory-Ukip coalition could force the vote to be brought forward to 2016, harming the chances of a re-negotiated position in Europe and making an exit more likely.

Deutsche Bank said the election was too close to call, and that there is likely to be significant volatility in markets in the run up to the vote.