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Sunak Faces Economic Misery Similar to Before 1997 Tory Defeat

(Bloomberg) -- Rishi Sunak’s government is facing the same levels of economic misery that led to the Conservative Party’s defeat in 1997, helping explain why the prime minister plans to delay the next election until late this year.

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The Misery Index, created in the 1970s to capture the combined impacts of unemployment and inflation, is likely to improve over the next 12 months in the UK as price pressures dissipate. For now, and during Liz Truss’s brief term as premier in 2022, it’s showing its worst levels since John Major was ejected from office.

The figures shed light on how voters feel about an economy that tipped into recession in 2023 and is still struggling with a cost-of-living crisis. Sunak must call an election by January 2025 and has said his assumption is he’ll call a poll in the autumn, giving time for the most painful impacts to recede.

“From an economic perspective, it makes sense for Sunak to wait as long as he can before calling an election,” said Ruth Gregory, an economist at Capital Economics Ltd. in London. “Later in the year the economy will probably be out of recession, a recovery will most likely be underway, inflation will be lower, households’ real wages will be rising and interest rates will probably be falling.”

The misery index, based on a Bloomberg analysis of unemployment and inflation data from the Office for National Statistics, averaged almost 12 since Sunak took office in October 2022. That’s down from 15 under Truss, the most painful period since the 1990s, but up from the levels under every administration from Tony Blair through Boris Johnson.

The index was created by the US economist Arthur Okun, an adviser to US President Lyndon B. Johnson, to capture how voters felt about the economy. Since then, it’s been used by politicians and academics all over the world to track sentiment over time.

For Sunak, the index underscores the challenge Sunak faces — voter perceptions of their own fortunes lag real-time data. So an improvement that most economists think is materializing now won’t register with most people for many months.

“While people blame the government for inflation going up, they don’t necessarily credit it with inflation going down,” said Luke Tryl, director at More in Common, a research group that conducts surveys in the UK, US and Germany. “Headline figures might be indicating more optimism, but people aren’t feeling that in their day-to-day lives. And how people feel has always been more important than what the stats say.”

Plotting the misery index against UK general election dates shows ruling parties tend to lose power after periods where the pain is most accute. At the moment, the Labour opposition leads the Sunak’s Conservatives in polls by some 20 points.

Inflation has been Sunak’s main challenge. Unemployment — the main headache for his predecessors — has remained subdued even through last year’s slump, which most analysts say is probably over. Soaring prices ate into the spending power of consumers and prompted the Bank of England to raise interest rates to a 16-year high, driving up mortgage costs.

The outlook is more sunny. The government’s official forecaster, the Office for Budget Responsibility, expects inflation, which averaged 7.4% in 2023, to fall below 2% in the next few months and interest rates to decline. It expects unemployment, which was 4% last year, to tick up to 4.4%.

Of course, unemployment and inflation aren’t the only issues on the political agenda. Voters are also feeling the impact of rising tax bills and deteriorating public services, especially for health. With inflation subsiding, most prices will merely rise more slowly — not fall back to levels people enjoyed before Covid-19 hit.

“Voters care about levels, not just year-on-year changes, and in level terms they’re a lot worse off compared to a few years ago,” said Andrew Goodwin, chief UK economist at Oxford Economics.

Also, a brighter economic outlook doesn’t necessarily translate into popularity for the ruling party. The Conservative position in opinion polls didn’t recover after 1992, despite the improvement in GfK Ltd.’s measure consumer confidence, according to Gregory.

At the moment, all generations are suffering from the surge in prices. Those under 40 have never felt a worse period, and older ones have to look back decades to remember an equivalent amount of pain.

Economic sentiment has been improving in recent months, thanks to lower price gains and expectations of interest rates cuts. Yet the Conservatives’ position in polls keeps worsening, with one recent survey showing the Tories with their worst-ever rating.

“This is a sort of end-of-term prime minister,” Tyl said, drawing parallels with Major’s defeat in 1997. “Major was approaching the end of a significant period when the Conservative had been in power 14 years. Rishi Sunak is at the same point. Major had Black Wednesday. Sunak has got the cost-of-living crisis.”

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