A statistical model of voting intentions continues to suggest that the Conservatives will fail to achieve an overall majority at the 2015 election despite an improving economy.

The model is designed to predict the poll differential between the main government and opposition parties based on economic factors. It was estimated on ICM-Guardian poll data extending back to 1984. The poll differential depends positively on average earnings growth and house price inflation, and negatively on the unemployment rate, retail price inflation and interest rates (Bank rate). More details are available in a previous post.

The Conservatives were 1 percentage point (pp) behind Labour in the June ICM-Guardian poll. The model estimates a 5 pp shortfall based on current economic readings. The 4 pp difference is within the historical margin of error of the model. Other recent polls have been less favourable for the Tories: the average calculated by the UK Polling Report website shows them lagging by 3 pp.

The model estimate of the Conservative / Labour differential has risen from a low of -10 pp last year as the economy has improved. The continued shortfall is attributable to low average earnings growth. According to the model, a big rise in earnings growth would be needed to generate a Tory lead of 6 pp, which is probably the minimum required for the party to achieve a Commons majority*. This is possible but would bring forward Bank rate hikes, with an offsetting poll effect.

The chart, an update from the previous post, shows three possible scenarios. The first is based on the latest MPC economic forecast in the May Inflation Report. In this forecast, average earnings growth rises to 2.75-3% by May 2015, the unemployment rate drops to about 6%, inflation is stable and Bank rate increases by 25 bp early next year. The model predicts a tiny Conservative lead by election time, consistent with Labour obtaining most seats in a hung parliament.

The second scenario is intended to be a “best case” for the Tories. Earnings growth rises to 4% while unemployment drops to 5.5-5.75%, but lower-than-expected inflation results in the MPC keeping Bank rate on hold. The Conservative lead reaches 6 pp by May 2015 – just sufficient to deliver a seat majority.

The MPC’s guidance, however, implies that it would raise Bank rate earlier in this scenario because of a faster erosion of slack. The third scenario uses the same economic assumptions but incorporates 0.25 pp rate hikes in November, February and May (just after election day). These hikes cap the Tory lead at 3-4 pp, suggesting similar numbers of seats for the two parties. Such an outcome might force a repeat election later next year or in 2016.

Non-economic influences could be of greater importance in the coming election, with additional uncertainty injected by the Scottish and promised EU referenda. A stronger economy should continue to aid the Conservatives but is unlikely to be sufficient to deliver victory.

*Each 1 pp rise in earnings growth boosts the Conservative / Labour differential by 4 pp, according to the model. See the previous post for a discussion of the relationship between voting intentions and seat allocations.