Shock summer election in Britain predicted to deliver 'historic' result

British Prime Minister Rishi Sunak makes a statement in the rain outside 10 Downing Street, announcing the UK general election will take place on 4 July in London, United Kingdom on May 22, 2024.Anadolu | Anadolu | Getty Images

U.K. Prime Minister Rishi Sunak ended months of speculation this week by announcing a national election on July 4, as forecasts suggest his right-wing Conservative Party is likely to be ousted after 14 years in power.

News of the vote came as a surprise to the public, the media and much of Sunak's own party. It had been expected to take place in the fall, ahead of a deadline of Jan. 28, 2025, giving the Conservatives more time to turn around weak poll ratings in which they have lagged the center-left Labour Party for more than two years.

Speaking while getting drenched by rain in a press conference outside 10 Downing Street Wednesday, Sunak said: "Uncertain times call for a clear plan and bold action."

He stressed that recent economic data was a significant part of his decision-making, telling the BBC's "Today" program Thursday that inflation had gone "back down to normal," the economy was growing and wages were "rising sustainably."

Price rises in the U.K. have cooled from a peak of 11.1% in October 2022 to 2.3% in April 2024, figures released Wednesday showed, after the politically independent Bank of England hiked interest rates for 14 straight meetings.

The U.K. economy fell into a shallow recession in the latter half of last year, before recording 0.6% growth in the first quarter of 2024.

"I think it is clear that while there is work to do and people are only just starting to feel the benefits, we have turned a corner and brought economic stability back," Sunak said.

'As good as it gets'

Bronwen Maddox, director of Chatham House think tank, said the election date had shocked many Conservatives who thought it would be held nearer to the U.S. election in November.

"I have to deduce [Sunak] thinks this is as good as it gets ... you can begin to hear signs of the economy doing better, house prices going up, less worry about energy bills, but I'm surprised he didn't give it longer to feed through," Maddox told CNBC by phone.

While Wednesday's inflation figures showed a sharp drop in the headline rate to near the Bank of England's 2% target, they were higher than many economists had expected.

Market bets on an interest rate cut in the summer fell as a result, and it now looks unlikely the central bank will cut on June 20, its last meeting before the election.

Labour is now expected to become laser-focused on slamming the Conservatives' 14-year legacy and on their own ability to maintain fiscal discipline, Maddox said, while keeping their policy agenda relatively light on details.

It will also try to skirt conversations on the U.K.'s post-Brexit relations with Europe, migration, the war in the Gaza Strip and the current government's controversial scheme to send asylum seekers to Rwanda, she added — all of which are highly divisive among its members.

Shadow Chancellor Rachel Reeves, Labour leader Sir Keir Starmer and Deputy leader, Angela Rayner, attend an event to launch Labour's election pledges at The Backstage Centre on May 16, 2024 in Purfleet, United Kingdom. Leon Neal | Getty Images News | Getty Images

Figures released Thursday showed net migration to the U.K. fell 10% in 2023 from a record high, which Home Secretary James Cleverly touted as a win for the government.

"Whatever happens it definitely will be a historic election," Hannah Bunting, lecturer in quantitative British politics at the University of Exeter and co-director of its Elections Centre, told CNBC's "Squawk Box Europe" on Thursday.

Labour needs a 12.7% swing in the national vote to win a parliamentary majority of just two — higher than that achieved by Tony Blair, who ousted John Major in 1997 on a wave of popularity — she said.

"I think it is going to be an election that we are talking about for quite some time, whether it is because Labour win a landslide and because the Conservatives are wiped out, as some commentators are expecting," Bunting said.

"I'm not 100% convinced on that just yet, because we've had local voting recently ... and while the Conservatives did very badly in those, the real winners there were smaller parties and independents rather than Labour. So if that translates to a general election as well, then that Labour landslide is looking much less certain."

Market reaction

While the election news rattled the political establishment, it failed to have much impact on markets.

Adrien Pichoud, chief economist at Bank Syz, said that for investors it has been clear for some time that there will be a change of government this year and the actual date of the vote was of limited consequence.

U.K. stocks traded slightly lower Thursday, bucking a wider trend, though this also followed Wednesday's inflation data and revised interest rate expectations.

The British pound's reaction was also muted, moving slightly higher against the U.S. dollar and lower against the euro.

"Contrary to some periods in the past, this time, a Labour government is not considered to be a risk scenario; in fact, investors seem sympathetic to the idea," Roman Ziruk, senior market analyst at global financial services firm Ebury, said by email.

"This is partly due to the party's shift towards the political centre since the last election," Ziruk added.

"Investors want stability, and we are now at a stage whereby a Labour majority, while heavily priced in, would probably be perceived by them as a mild positive for sterling, even if only due to the avoidance of a dreaded hung parliament."