With every week that passes, the “fruitcakes and loonies” of Ukip, as David Cameron famously described them, are making more and more progress. From winning the European elections earlier this year to securing its first elected MP, Nigel Farage’s band of insurgents is starting to make a big impact on British politics.
The political establishment has started to accept, rather reluctantly, that the party is a force to be reckoned with. Now the economic establishment may have to do the same thing – and investors may have to start adjusting their portfolios to the party’s rise.
Why? Because regardless of how many seats Ukip ever actually wins at a general election, the other parties are responding to its agenda and that is going to have a big impact on the economy.
Insurgent parties such as Ukip don’t have to win elections outright to shape policy. They can do that simply by setting the agenda. And Ukip is already doing that, most significantly on EU membership and immigration. That issue has so clearly struck a chord with a large section of the electorate that both major parties are scrabbling around to keep up.
The Conservatives are now demanding an end to free movement of labour within the EU as part of their promised re-negotiation of EU membership if they win the next election. Labour is starting to hint that it might do the same.
Ed Balls, the shadow chancellor, has already started to make noises about that, and, given how many votes Ukip is now collecting in Labour seats as well, it would be surprising if the party did not feel bound to match the pledge.
That is significant for investors, and perhaps even more so than EU membership itself. Despite all the heat the issue generates on both sides, in reality whether we are in or out of the EU probably doesn’t make much difference to the economy.
Free trade within Europe, as in the rest of the world, is regulated by the World Trade Organisation (WTO), and since Germany – the world’s second biggest exporter after China – is unlikely to want to pull out of that, there won’t be any trade barriers if we do leave.
They would be illegal under WTO rules. We’ll have as much access to the European market as Korean or Japanese companies do – which is plenty. We might have a few less stupid, bothersome rules from Brussels, but we’re perfectly capable of creating those ourselves, so we’ll probably just recreate them. It does not make much difference either way.
What will be important is migration. Very high levels of immigration, in particular from eastern Europe, have certainly had a huge impact on the economy. The population has been rising at a net rate of around 200,000 a year, equivalent to adding a town roughly the size of Portsmouth.
More people means more output, especially when most of them are young and hard-working, as migrants typically are. Indeed, since the crash, immigration has been responsible for just about all of the UK’s growth. GDP per capita is still below where it was in 2008 – we just have more people.
You can argue about the rights and wrongs of that. Personally, I believe it is a good thing. Ageing countries with falling populations don’t grow – just ask the Japanese. But whether you think it is right or not, you cannot deny the economic impact.
British companies have become reliant on a huge supply of cheap migrant labour, which has kept their costs down and allowed them to expand without having to worry very much about whether they can get staff. Without that, they will struggle to stay competitive. And ending that supply of cheap labour will mean a wrenching change, and will push up costs.
So, what kind of companies should investors be worrying about? The answers are fairly obvious. Anyone who has ever tried ordering a double skinny latte at Costa Coffee will know that the Hungarian for ‘thank you’ often goes down well with the person serving you. Do you really want to be a shareholder in its owner, Whitbread, if those staff are no longer so readily available?
Much the same is true of its other brands, such as Premier Inn. The pub chains, such as JD Wetherspoon, might well be similarly challenged. The supermarket chains would be struggling to find people to clean their shops and drive their vans. And the construction companies? Without armies of Polish workmen, few would hit their completion times.
And the impact might ripple out well beyond that. Plenty of law firms and banks in London might struggle if the women working for them no longer had cheap, reliable nannies to look after their children while they went to work.
True, some of the high-tech manufacturers might benefit from a looser relationship with the EU, especially if it allowed the UK to cut its own trade deals with China, as the Swiss have done. Ending free movement of labour, however, is likely to be the most significant change in UK economic policy in a couple of decades.
Rightly or wrongly, Ukip’s agenda is already shaping that, regardless of whether it ever gets a sniff of real power. And smart investors should start adjusting their portfolios now – and sell every FTSE company that relies on cheap labour.