A quick summary for those without the time and inclination to pore through this entire briefing - deeply disappointing results for the Conservatives, especially in many of its traditional strongholds in the south and midlands;  substantial, telling but inconsistent progress for Labour across England; solid advances for the Liberal Democrats and Greens especially in areas where they already have an elected presence.

Never forget, in the wise campaign-trail words of the chief advisor to soon-to-be elected President Clinton over thirty years ago, "It's the economy, stupid!"

Funnily enough the strange obsession with US politics that grips the UK political class is one of the main reasons that such importance is attached to our annual cycle of local government elections.  Most MPs, political journalists and policy advisers have an impressive recall of US political trivia and minutiae. By contrast, ask them for the name of the current French Prime Minister, German President or Head of Government in even a mid-sized EU state and silence is likely to reign.

So it is that we try to equate our confusing mix of county, unitary and district council electoral contests - some held annually, others on all-up basis every four years, a few with half their seats being fought biannually - with the far more consequential US mid-terms. As always in the UK's highly centralised political system perceived importance is attached only to 'what this all means for central government'. Heaven forbid that people might actually register their vote less as a protest against the government of the day, but more in support of local personalities and initiatives on planning, recreation policy, transportation or neighbourhood regeneration.

However, these were potentially the last full set of English polls to take place before the next General Election campaign is in full swing.  As such they are the most proximate testing of the overall political temperature, especially if that impending election were to be called in spring or early summer 2024.  Second only to parliamentary by-elections, which by their very nature arise only haphazardly, local elections impact most on the morale of the professional and activist base of all political parties. Campaigning means meeting large numbers of electors, testing the temperature of their anxieties and working out effective lines of attack and defence.

Lest we forget, only two years ago, Boris Johnson's Administration was riding high. In the aftermath of a remarkably strong performance in the pandemic impacted May 2021 local elections all the talk was of the 2020s being the Johnson decade. It was Keir Starmer who was painted as the transitory figure, widely anticipated as being merely the first of several hapless Opposition leaders. Yet as we know over the past 18 months, Labour has enjoyed consistent leads in the opinion polls. Since last summer these have invariably been by commanding margins, albeit showing some signs of softening as the Sunak government has stabilised the ship of state since arriving in office last October.

That said it is important that we do not read too much into these results. Whilst they indisputably impact party mood and confidence, local elections have often proved a notoriously unreliable weather vane as to what happens next. Predictably over recent weeks there has been a universal attempt to dampen expectations. There is nothing new in governing parties making apocalyptic predictions of massive losses at the same time as those in opposition suggest that even the most modest of gains are likely to be beyond their reach. If all the fantastical claims we have heard recently had come to pass, Electoral Returning Officers across the country would be hard pushed to declare winners anywhere!

The baseline of results against which yesterday's contests are to be compared was the May 2019 local elections. This was a famously untypical set of elections with Theresa May's administration on its last legs after the intense Brexit stalemate. Neither the Conservatives nor Labour managed 30% of the national vote with the Tories losing a quarter of the seats they were defending then (over 1300 across the country) and Labour unexpectedly failing to make any significant headway at all  - instead it was the Liberal Democrats with 700 gains and the Greens with almost 200 who both more than doubled their previous representation.  

This time round it would have been unthinkable for Labour and other Opposition parties to have failed to make significant inroads. One of the curiosities of the Conservatives' thirteen years in national office is just how well their standing in local government has held up. Until this set of results, they had consistently been the largest party in UK local government for nearly two decades.

So the attention of the UK political class now turns to the General Election, which as so often will boil down to the straightforward proposition of "Time for a change" versus "Don't let the other lot ruin the progress we have made".

Prime Minister Rishi Sunak will relentlessly seek to present the administration he has led since last October as competent, responsible and having a forensic attention to detail and data at its heart - a diligent government for difficult times, worthy of public trust at a time of intense economic insecurity and geopolitical turmoil.

But this is where it is the state of the economy that really matters. Last year and this (2022/23) represents an era of the biggest fall in individual living standards on record. This represents a grim backdrop for any incumbent government, especially one that seeks to defend a 13-year long record in office. This has been compounded by turbulence in the financial markets over recent months that now seems likely to play out in the 'real economy'. What should we make of its likely impact within that all important pre-election timeframe?

Prolonged financial market nervousness in both London and New York is to be expected. Both the UK and US face General Elections by the end of next year with a reasonable prospect of a change in administration (if not necessarily policy prescriptions). Despite concerted central bank efforts to tame the beast, inflation is likely to remain higher and endure for longer than most commentators currently assume.

Similarly, whilst interest rates have risen sharply over the past 18 months (remember that they still stand at historically low levels) I suspect they are likely to come down more slowly than is widely presumed. Evidently this will continue to impact sentiment in the commercial and residential property markets.

Most Britons under the age of forty have been led to assume that near zero interest rates are the norm. Adapting to a world where the cost of money is no longer virtually free, where indebtedness and profligacy are penalised rather than rewarded will prove tough. Central banks will come under huge political pressure in this pre-election period. As someone who has always been rather sceptical of the Bank of England's much heralded "independence" (as political appointees, Governors typically have highly attuned political antennae) I reckon that by this time next year the Bank will have seen fit to have reduced interest rates to around 3% as a "reward" for bringing inflation down from the double-digit levels of recent months.  

Watch now for the unravelling of the huge burden of debt that overhangs Western economies in this brave new world of normalised borrowing costs. Governments, companies and households alike are afflicted. There is clear evidence that as funding costs rise, banks are cutting back on loans, renegotiating or rapidly terminating debt facilities and generally battening down the hatches. Whilst this may seem more acute in the US after their three high profile banking collapses of recent weeks, do not assume that similar calculations are not already taking place in banks closer to home.

Another credit crunch looms. We all remember how this was the precursor to the financial crisis of 2007-08. In the months ahead the SVB, First Republic and Credit Suisse banking collapses and their aftermath may also place in full view an unpalatable cocktail of derivatives and highly leveraged real estate exposure.

In so many aspects of life, moral hazard seems to have become an historical concept. Note how quickly and comprehensively the US financial authorities moved to protect SVB's depositors and have presumably underwritten JP Morgan's salvation of First Republic. However, this type of activism augurs ill for government balance sheets throughout the West - in truth the public clamour for constant protection by ever more government intervention is something that should be resisted, rather than pandered to.

The views, thoughts and opinions expressed within this article are those of the authors and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit.