(Bloomberg) -- The UK’s reputation as a global investment destination hit rock bottom last April. The European Union was a “more attractive place to start a business,” Microsoft Corp. President Brad Smith said after the UK competition watchdog blocked the company’s takeover of games developer Activision Blizzard. For post-Brexit Britain, no rebuke stung more.

Carmaker Stellantis NV, UK manufacturer Dyson Technology Ltd. and pharmaceutical giants Eli Lilly & Co. and Astrazeneca Plc followed up with their own criticism. ARM Holdings Plc, Britain’s technology crown jewel, chose to list in the US as capital raisings from initial public offerings fell to a 14-year low. Scars from the financial crash triggered by the government’s disastrous mini-budget in September 2022 were still fresh, the UK’s recovery from the pandemic trailed all other Group of Seven nations and inflation was roaring ahead. Britain, it could be argued, was beginning to look like a basket case.

Yet, 10 months on, confidence is recovering. In interviews with Bloomberg, WPP Plc Chief Executive Mark Read said, “we’ll all feel a little bit better about 2024 as the year goes on” while British Land Co. CEO Simon Carter described himself as “cautiously optimistic.” The government has “made changes” by fixing Britain’s relationship with the EU and bringing taxes down, “that’s creating a more positive backdrop for investment,” Carter added.

Their comments bolster a new sense of optimism ahead of a general election later this year, in which both major parties are vying to cast themselves as partners to business. While the economy technically ended 2023 in a mild recession, economists forecast a recovery as inflation recedes, interest rates fall, living standards improve and investment picks up. Chancellor of the Exchequer Jeremy Hunt has made little secret of his ambition to cut taxes during his budget address on Wednesday, potentially further boosting the economy. 

The economy is expected to grow 1% by the start of next year, according to the latest analysis by Dan Hanson, Bloomberg’s chief UK economist. That’s similar to the Office for Budget Responsibility’s view. The expansion could accelerate to as much as 1.9%, Hanson said, if optimism prompts households to spend some of their excess savings.

While that’s hardly boom times, it would be enough to push Britain to the top of the G-7 table. Japan also ended last year in a recession and Germany may also be in one.

Moreover, Britain’s political backdrop looks favorable to investment for the first time in a long while. Gone for now are the fiscal risk-taking of Liz Truss and the “f*** business” populism of Boris Johnson. Instead, Prime Minister Rishi Sunak, a former chancellor and Goldman Sachs Group Inc. banker, and Labour leader Keir Starmer, the country’s ex-chief prosecutor, are promising to focus on growth and maintain fiscal rules to get Britain out of its years-long funk. 

“As the respective leaders, I think you’ve got two very good individuals,” Lloyd’s of London Ltd. Chief Executive John Neal said in an interview. Sunak has “the financial acumen, the attitude — he ticks all those boxes,” Neal said, adding that Starmer’s Labour was “presenting themselves confidently,” more pro-business than the party has been since the New Labour years under Tony Blair.

Such predictability may look increasingly attractive during a year in which some two billion voters are heading to the polls in 50 countries, including an increasingly likely US presidential rematch between Joe Biden and Donald Trump. Labour is currently leading by more than 20 percentage points in surveys ahead of an election that Sunak has said he will call in the second half of the year. While populists such as the Nigel Farage-backed Reform UK party have crept up into the debate, they have no chance of forming a government. 

“Each year, we look at the risks from a geopolitics perspective, and for a number of years the UK has looked like a big risk area — Brexit and such,” said Carter, of British Land. “But actually around the world, it feels more volatile. If we do have a strong result in the election, then that’s going to lead to political stability.”

Of course, massive challenges face the leader of the UK’s next government. Britain’s productivity, which will determine its long-term potential, is a fifth weaker than in Germany, France and the US. Living standards have barely improved since 2010, with average weekly earnings after adjusting for inflation just 2% higher today. Local equity markets are lagging their peers, with companies raising just $1 billion on the London Stock Exchange last year, the least since 2009. 

The public finances are also a mess, due largely to the hundreds of billions of pounds spent on subsidies to soften the blow of Covid-19 and Russia’s invasion of Ukraine, as well as interest-rate increases meant to fight inflation. National debt is at a high last seen in the 1960s, the tax burden is at a 70-year peak and debt-servicing costs are at 1949 levels.

That limits the space for fiscal stimulus, and contributed to Starmer’s decision last month to dramatically scale back to £4.7 billion ($5.9 billion) his promise to spend £28 billion a year on the UK’s green energy transition. “This is the worst inheritance any incoming government has had since the Second World War,” Labour’s chancellor-in-waiting, Rachel Reeves, a former Bank of England economist, said in a meeting with reporters last week. 

But for all the talk of British decline, official figures suggest that the UK remains the top investment destination after the US. It attracted the second-most greenfield foreign direct investment in each of the three years to 2022, trumping even China, according to the Financial Times’s fDi database. France may have overtaken the UK in number of deals, but receives barely half as much in value terms.

Aiding the argument for optimism was the Office for National Statistics’s surprise upward revision in September of the UK’s estimated growth since the pandemic. The changes left the economy in the middle of the G-7 pack, instead of at the bottom. The agency had earlier discovered that the UK spends one-third more than previously thought on research and development.

Sentiments began to improve during the summer, said Investment Minister Dominic Johnson, who credited Jaguar Land Rover owner Tata Group’s £4 billion commitment to an electric-vehicle battery factory in Somerset, supported by government investment. Nissan Motor Co. and BMW AG’s Mini followed with EV investments of their own, while Vauxhall-maker Stellantis started producing electric vans in Ellesmere Port. 

“It took time for the ripple effect of the Boris Johnson, Liz Truss period to be calmed down by Rishi Sunak,” said Dominic Johnson, who’s not related to the former prime minister. “Britain was starting to pick up, but it takes time for that message to get out.”

Business investment — buoyed by government policies that allowed companies to write off first 120% and then 100% of capital expenditures — has grown faster than any G-7 nation since the tax relief was introduced in April 2021. During one week in November, South Korean firms committed £21 billion to UK renewables and infrastructure and £29.5 billion was pledged at the Global Investment Summit — including £2.5 billion by Microsoft, its Activision deal now cleared by the Competition and Markets Authority. 

By then, Microsoft’s Smith had changed his tune, affirming the UK was still “an important market for companies around the world.” Barclays Plc CEO C.S. Venkatakrishnan said while discussing the bank’s earnings last month that he was “very, very bullish on UK as a place to do business.”

Longer term, the artificial-intelligence revolution promises a more fundamental revival as the technology plays to the UK’s strengths, something Sunak sought to tap with a summit last year at the World War Two-era code-breaking hub of Bletchley Park.

“Because we’re a service-based economy, it could make our service structure much, much more productive; much, much more efficient,” WPP’s Read said. “We have to lean into it.”

Executives often cite Sunak’s negotiation of the so-called Windsor Framework with the EU with changing the mood. The deal, which resolved a bitter dispute over Northern Ireland border checks, showed that Britain’s relations with its biggest trading partner were improving. The UK has since rejoined Europe’s Horizon science program and signed a memorandum of understanding with Brussels on financial services. 

“Brexit introduced event-horizon risk,” said Kallum Pickering, a senior economist for Berenberg. “Event-horizon risk means you can’t invest until after the event. The Northern Ireland border was final part of that puzzle, as it carried the risk of a hard Brexit. We’re back to normal levels of political risk.”

Brexit is just one example of a contentious issue where there’s relatively little open conflict between Sunak and Starmer. While most observers expect Starmer, who backed Remain, to prioritize relations with Brussels, he’s rejected any talk of reversing major terms of the divorce as he courts Leave voters in key battleground constituencies. 

Both parties want to release billions of pounds from pension funds for investment in the UK, in their search for growth. The Tories also promise to adjust regulators’ incentives to emphasize growth against supervision, while Labour says it will overhaul planning to encourage more home-building.

Hunt will deliver Wednesday what could be his last fiscal statement before the election. Although tax cuts are expected, he has promised to focus on those that are growth-enhancing. Such an example were his decisions last year to give 100% tax relief on capital investment and a cut to the national insurance levy, which the Office for Budget Responsibility determined to be the biggest boost to the supply capacity of the economy on record.

Reeves, for her own part, has promised to maintain income, corporation and value-added taxes to provide the certainty business craves. Taxes won’t “shoot up and down like a yo-yo,” she has said. Labour is the “party of wealth creation. To be pro-business and pro-worker are two sides of the same coin.”

“What is really important to business is stability, clarity and consistency,” Legal & General Investment Management CEO Michelle Scrimgeour said. “The more that we can have policy that transcends government, the better we will be as a country.” 

The UK’s slowdown has been remarkably mild considering the BOE pushed borrowing costs to a 15-year high in a bid to rein in inflation. The consumer price index is expected to be around the central bank’s 2% target in April, after sharp declines in energy bills.

Unemployment remains near a record low, and wages have been rising faster than inflation for six months. The BOE reckons that living standards will grow in both 2024 and 2025. Household balance sheets are stronger than they have been since 2002, according to the central bank. Companies have reduced debt by even more and lenders are still well capitalized. 

Meanwhile, one consequence of the recent pessimism is that British assets look cheap. The MSCI UK share index trades at a 40% price-to-earnings discount to the US and companies are delisting as overseas buyers snap them up. 

Charlie Walker, deputy chief executive of the LSE, said the freeze on share sales appears to be thawing. “More companies are exploring IPOs than we have seen in a couple of years,” he said. “People are certainly talking a lot more positively about the future.”

Bank of America Corp. strategist Kamal Sharma made headlines two years ago when he warned of a potential “existential” sterling crisis. Nowadays, he predicts the currency will surge to $1.37 by the third quarter, which would be its highest level in over two years. The pound has posted gains against all but two major currencies tracked by Bloomberg so far in 2024, and currently trades under $1.27. “The pound is the US dollar of Europe,” Sharma said.

A lot of Britain’s outlook may depend on how fast the BOE can pivot to rate cuts. Investors have pared back expectations for easing by the bank — currently pricing just two quarter-point cuts in 2024 — as policymakers led by Governor Andrew Bailey emphasize continued concerns about underlying inflationary pressures. 

Executives argue a clearer, more ambitious industrial strategy will be necessary to covert short-term optimism into a longer-term narrative shift. But at least for the moment, there’s agreement that growth must be a focus.  

“Where we are now is a fundamentally better place than we were two or three years ago, there is a sense of a steady hand on the tiller,” said Marks & Spencer Chair Archie Norman, a former Tory MP. “We have got two parties competing on, not a consensus, but on comparable ground with a slightly different attitude and philosophical way of looking at things and that’s a healthy place to be.”

--With assistance from Andrew Atkinson, William Shaw and Greg Ritchie.

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