Possible headache for the pound as economics mixes with politics

It was my birthday over the weekend and you would think that at the age of 31, I would have learnt that mixing the grape and the grain is not advised. Maybe next year I’ll grasp that concept. But is it the mix that causes problems or the quantity? My mother would probably say both. I can see a lot of similarities with the state of the UK economy and upcoming election and its effect on the pound moving through the second quarter of this year.

The combination of economic data and political intrigue is a potent mix for any economy. Within the UK, the former is a long way from being poisonous for the pound. The final and complete reading of Q4 GDP is released tomorrow and will hopefully be seen as the nadir of the UK economy on this recent run of strength. 0.5% is by no means a poor reading but sits at nearly half the growth rate that the UK economy had been pushing out through the remainder of the year.

The story still holds true that I am looking for the UK economy to push onward on the basis of how low levels of inflation are supporting consumers. Similar help is being given to investment in the economy in that the Bank of England is expected to maintain interest rates at their current level into 2016.

If you believe that the falls in oil prices that have benefited the world economy are supply based – too much oil leading to lower prices – then inflation and a stable recovery are a lot more likely than if you believe that they are demand based. Lower demand globally is a much more difficult proposition to fix. Central banks have been trying since 2008 with mixed and altogether limited results.

Mixed results seem to be a good way of categorising what is happening in opinion polls for the election, which takes place in five and a half weeks. Following the Paxman interviews on Thursday, YouGov’s latest poll showed Ed Miliband riding the crest of a four point lead. A second poll for the Daily Mail and ITV showed Cameron and the Tories in the lead by the same margin. A four point lead for Labour would equal their best polling result of the year while the internals of the second poll showed an increase in the perceived performance of David Cameron as Prime Minister.

Outliers in polling data are always exciting. Cast your mind back to the Scottish referendum and the poll that showed the Yes camp in the lead. No other polls had shown a lead for the Yes camp and none did afterwards. I have a feeling that we have seen two outliers and that the trend of ‘too close to call’ will continue for now.

The poison comes for the pound in that a break towards certainty looks unlikely given the division within UK politics and the fractures falling in favour of the smaller parties. As a result, policy implications are as vast and wide as this fair country itself. The two most divisive issues remain the level of fiscal consolidation and the part that the UK will play within Europe (and Europe within the UK).

So the economics of the grape must now combine with a potent grain of the election. Given my weekend, I think we are looking at a headache and everything spinning rather quickly. I can see the same thing happening for the pound.