President Joe Biden and UK Prime Minister Rishi Sunak are gearing up for elections in a challenging economic climate. Despite low unemployment rates, wage growth, and controlled inflation, these accomplishments may not necessarily guarantee success.
A Tale of Two Leaders
In the United States, President Biden faces the task of convincing voters amid thriving economic conditions. The unemployment rate is at a historic low, wages are on the rise, and inflation is under control. However, these achievements might not sway voters as expected.
Similarly, across the pond in the United Kingdom, Prime Minister Sunak is preparing for an election likely to take place in the second half of the year, potentially coinciding with the US vote in November. Sunak had previously pledged to combat inflation and stimulate economic growth.
Meeting Goals, but Falling Behind
Technically, Sunak has delivered on his promises. Inflation has declined, and the economy has avoided recession. Recent data revisions have even shown that the unemployment rate has consistently been lower than previously thought, currently standing below 4%. Nevertheless, the message seems to be falling flat. The Ipsos Mori poll published on Jan. 30 reveals that Sunak's Conservative Party is trailing Labour by about 20 percentage points.
An Unsettled Electorate
One possible explanation for this political dilemma is that people still feel financially strained after the surge in inflation between 2021 and 2022. In the UK, inflation peaked at a staggering 11%, outpacing average pay growth from October 2021 to June 2023. Although real wages (pay increases adjusted for inflation) have shown positive trends since then, they have yet to be significant enough for people to noticeably improve their financial situations.
George Moran, an economist at Nomura in London, suggests that Sunak's targeted economic issues are not at the forefront of voters' concerns. Instead, people worry about the highest tax burden in 70 years, soaring energy prices, and the prospect of rising mortgage rates. While positive real wages are starting to emerge, it may be too little, too late in the eyes of the electorate.
The Hidden Challenge of Economic Growth
Increases in gross domestic product (GDP) and low unemployment rates don't guarantee a successful reelection campaign if voters feel financially strained. Inflation rates are becoming a cause for concern, overshadowing the positive indicators. Despite a considerable slowdown in price growth, prices remain significantly higher compared to just a few years ago, continuing to impact people's purchasing power.
The recent strikes by train drivers, doctors, nurses, and teachers in the U.K. highlight this issue. They are demanding higher pay to compensate for a decade of below-inflation increases in the public sector.
Compared to Sunak, Biden should have an easier time navigating the economy. The International Monetary Fund (IMF) projects U.S. GDP to grow by 2.1% this year, following a solid 2.5% expansion in 2023. This growth rate surpasses that of the U.K., with the IMF estimating a 0.6% growth in 2024 after tepid growth of 0.5% last year.
As of January, the U.S. unemployment rate stood at 3.7%, one of the lowest levels since early 2020. Wages have been outpacing inflation since March of last year. However, there was a period of two years when inflation significantly outpaced pay growth, leaving a lasting impression on people's memories. Median household income, adjusted for inflation, has even declined from 2019 to 2022.
A recent CNN poll reveals that nearly half of Americans believe the economy is in a downturn, with the rising cost of living being the main factor influencing their viewpoint. Additionally, a January 25th Pew poll indicates that 65% of Americans disapprove of Biden's job performance, compared to only 33% who approve.
Neil Shearing, chief economist at Capital Economics in London, comments on the issue, stating, "Weak income growth is an issue. You get a sense that working hard never pays off, and the struggle is real."
Both Biden and Sunak face the challenge of whether the public will recognize their economic achievements before casting their votes. Until then, both politicians might want to shift the focus to other topics, despite their positive economic records.
