The abyss ahead of Gordon Brown...

The polls are now showing levels of support that would result in a hung parliament that would, given the maths, almost certainly produce another Labour government. However, expectations continue to be that Labour will lose the next election. As I type the bookies still have the Conservatives as the heavy odds-on favourite, betting spreads have a Tory majority, the last time the PoliticsHome panel of MPs, political journalists and so on were polled 40-odd percent still thought there would be a Conservative majority, even left leaning pundits like Michael White in the Guardian are saying they still don't expect Labour to win. Why?

I can't claim to know the mind of punters or pundits, they may all simply be in denial, but I suspect the reason is because they expect the economic situation to eventually sap the government's support. Unless they expect a substantial recovery in the economic situation next year, they are probably right to do so: let's look at the figures.

The simplest thing we can say is that people are very pessimistic. Asked if the economy is getting better or worse people are overwhelmingly negative - in MORI's lastest poll 66% expected the economy to get worse next year. This is, however, a bit of a statement of the bleeding obvious. To get any thing useful we need to look a bit beyond that, and that reveals two interesting gaps between expectations and what is likely to happen.

Firstly, there is a sharp contrast between people's expectations of their own families finances and that of the country as a whole. The difference is sharpest in Populus's questions - the net score for expections of the economy as a whole is minus 35, for "me and my family" it's plus 7 (51% think they personally will do well in the next 12 months, 44% badly). In TNS's regular surveys of consumer confidence for Nationwide the net score for the public's expectation of the economy in 6 months is minus 23, but for people's own household it is exactly neutral (16% think they'd be doing better, 16% worse).

Some people of course won't suffer, mathematically its theoretically even possible that most people won't, if a few big losers outweigh many small winners. Realistically though we have a gap between expectations and reality here - people think the economy is headed for disaster, but they and their family will manage to buck the trend. While some will be right, the chances are an awful lot of them won't be. Reality check one.

The second is the upturn in economic optimism. While all polls show people very pessimistic about the economy, almost all the trackers of public confidence in the economy show it heading upwards since the summer. Specifically, many show a big spike around the time of the bank rescue plan (see, for example, MORI at the end of this pdf, or this TNS data).

This also, of course, co-incides with the Labour government's recovery in the polls. This isn't as obvious as perhaps it sounds, when polls have asked specifically about whether the PBR, say, will improve the situation very, very few say it will make a big difference. The recovery in economic confidence though tells the underlying truth; people may not be able to point at a specific policy and say it will solve things, but collectively the government's actions have served to convince some people that things are getting better. It suggests that Labour have recovered in the polls not just because people have seen Gordon Brown looking more capable, purposeful and at ease with himself, the Labour party more united, or have looked to experience in a crisis. Support for Labour has increased because people think the action they've taken is actually working.

Here then, is the problem. If the government's increased popularity is due to people thinking their policies will work, what happens if they don't? And on what criteria will that judgement be made?

If the criteria for success was avoiding a recession or major job losses this would be an easy exercise with a very bad answer for Labour. Thankfully for Gordon Brown, that's not the yardstick he'll be judged by. We know the public expect a recession, we need to judge how deep their expectations are - for that we need to look at questions asking what people think about the economy in the future. Going back to the TNS data for Nationwide, asked about the current economic situation 76% think it is bad, 15% normal and 9% good – this has been on a steady downwards trend since 2007. When TNS ask how people think the economy will be in 6 months time 45% think it will be worse, 30% the same, 22% better - significantly up from a few months previously. In other words, a majority of people now think we've hit the bottom and a significant minority of them think we'll be on the up in 6 months time. In Nov 08 Populus too found a significant chunk of people taking a more positive view: 31% of people told Populus they thought the economy would do well in the next year, up from 22% in July. MORI's last figures are less optimistic, but the optimists are there - 18% think things will get better, 14% the same, so almost a third think we've reach the bottom (again, significantly higher than in the Summer).

I'm not an economist, I've no particular way of knowing what will happen to the economy next year, but I am not seeing any predictions that next year will be anything but horrific economically. If that does happen the chances are - though it is not a foregone conclusion - that this will push economic confidence down again as reality hits home. The thing that will do it is not the raw economic figures, but experiences of friends and family, and the stories that make it real, things like the immentient closure of Woolies and the job losses that will entail, and the further companies and employers that we can expect to go to the wall next year if the predictions are correct.

Will this necessarily be bad for the government though, surely the recession has been good for Labour so far? There is a perception that, whereas governments normally lose popularity when the economy goes horribly wrong, Gordon Brown and Labour have bucked the trend. That perception is wrong. Confidence in the economy started going after the run on Northern Rock - roughly the same point that Labour's lead vanished and the Conservatives moved ahead. Labour's position completely tanked in the months after the budget, at the same time as economic confidence really began to fall through the floor. The recent recovery in Labour's position in the polls dates from the bank rescue in October 2008, which has also seen a recovery in economic confidence. The graph below shows the public's net expectations for the economy in 6 months time, from TNS's monthly survey for Nationwide (in blue), compared to Labour's average lead in the polls over the last 18 months or so (in red).

It speaks pretty much for itself. Brown's government's fortunes are not defying gravity, they are tied to perceptions of the economy. Since the bank rescue plan significant numbers of people have become more optimistic about the economy and Labour's fortunes have gone hand in hand with that recovery in economic optimism. If that falters I suspect Labour's support might go the same way, and at the moment all the predicts are that it will. That is the reason to think that the forcecast for Labour isn't as rosy as the actual voting intention figures we are seeing at the moment would suggest.

The worst thing for Brown is that even if the economy actually does do well, the economic pundits are all proved wrong and the British economy bounces back strongly before any expects, he still isn't out of the woods. At that point, as Danny Finkelstein wrote earlier this month, the public suddenly have much less reason to be risk adverse and the "experience vs novice at a time of crisis" argument ceases to work. It's worth remembering that while polls now universally show that Gordon Brown is more trusted than David Cameron to deal with the present crisis, Populus still have Cameron leading as best to "lead Britain forward after the next general election". Similarly, YouGov show Labour miles ahead on dealing with the economy in the present crisis, but the Conservatives ahead on the economy per se.

So, while the current polls are good for Labour, at least in the sense they would probably end up the largest party if there really was an election tomorrow, the problems ahead are daunting. Obviously anything can happen, but the chances of a Labour victory are probably lower than the raw voting intention scores would suggest - hence the pundits and punters opinions I started the article with. However, even if the economy does drag Labour's support down again, it doesn't follow its going to happen straight away, or indeed that Labour won't rise further before economic reality hits home. If Labour do get closer to the Conservatives in the polls (or indeed overtake them) in the new year, then Gordon Brown really should call an election there and then. Under the circumstances, he could win it.