The major UK political news since the February Review was published is the surprise call for a general election, to be held on 8 June. Financial markets appear to have viewed this development positively, perhaps based on electoral polls which suggest the Conservative Party would be returned to government with an increased majority strengthening the position of the Prime Minister (figure 1). Commentators have indeed suggested that such an election victory will enable the Prime Minister to pursue a new relationship with the EU that is less damaging to the economy in the long run than defaulting to WTO rules, while also raising the prospect of a transitional period upon exit at the end of March 2019. But one should not forget that formal negotiations with the remaining EU27 and EU institutions have yet to begin and the hopes of financial market participants could well be dashed over the course of the complex process of a negotiated withdrawal from the EU.
Much of the election campaign will be dominated by the UK's exit from the EU. How far other important policy issues are crowded out is an acute near-term risk with long-run implications. There are a number of structural economic issues in the UK that need to be addressed. Pressing structural issues, not least the low levels of investment, which have been so endemic to the UK, and the more recent abysmal productivity performance are two important and, indeed, interrelated issues which intersect to determine our long-run prosperity. As Box A highlights, that our economic performance since 2010 has been poor, is most evident in the absence of any meaningful increase in the standard of living. The Commentary in this Review discusses these structural issues in detail and ends emphasising the risk we face, "we may, once again, be in danger of letting the urgent drive out the important. Political parties should not shy away from facing the question of Britain's underlying economic weakness and should be called upon to offer solutions that address the lost decade of economic growth the country has endured".
At the time of writing, the manifestos of the main political parties have still to be published. It is only with the publication of these manifestos that political parties will begin to reveal how much of their election campaign will be dominated by leaving the EU; it is, after all, only with the publication of these manifestos that the election process truly gets underway.
In stark contrast, the process of leaving the EU has finally started, with the Prime Minister giving formal notice of the UK's intention to leave the EU on 29 March. The triggering of Article 50 of the Treaty of Lisbon before the end of March 2017 was not news for financial markets (see Box B). What Box B does highlight is the improvement in sovereign bond premia since the start of this year, while sterling has appreciated around the Prime Minister's Lancaster House speech and her calling of a general election...