There seems to be a shortage of political judgement in the UK Conservative party. First, the pro-EU Prime Minister David Cameron calls a referendum of the UK's membership of European Union. Fail. Then, new Prime Minister Theresa May calls an election aimed at strengthening her hand in the lead-in to the start of Brexit negotiations and to crush the Labour Party. Epic fail.
Mid-term polls require careful interpretation. By definition, in the middle of a parliamentary term no-one is expecting an election. People aren't really focusing on the big political issues. Poll leads are therefore a ‘soft’ rather than a firm indication of party support. Call an election and all of a sudden people are focusing on the issues, and resolve hardens. Any disgruntlement with any Government policy? Here’s your opportunity to send a message to the Government. Couple that with a poor campaign and the rest, as they say, is history.
The biggest casualty of the election outcome is the Brexit negotiations. They were always going to be complicated and tough. We were already thinking that the process of exiting the single market along with putting new arrangements in place would take longer than two years. Now the hard-Brexit Tories have lost their majority and appear to be entering into a confidence and supply agreement with the soft-Brexit Democratic Unionist Party (DUP). What was already going to be complicated just got a whole lot more complicated.
The political uncertainty may not be over yet. Mrs May is yet to face her caucus. She is in a vulnerable position of her own making. Former Chancellor George Osborne has labeled her a "dead woman walking". Harsh, though probably true. A leadership contest would add more uncertainty and likely delay the start of the Brexit negotiations proper. Furthermore, fresh elections cannot be ruled out.
Our expectation with respect to the economy was that business confidence would wax and wane as Brexit negotiations played out. Relative to that base line expectation, and with the fresh uncertainties about how that process will play out, the risk is that confidence wanes more than it waxes. That will have a direct impact on economic performance and we continue to believe the Bank of England is too optimistic on the UK growth outlook. Recent weakness in UK house prices, which have been surprisingly resilient to the Brexit process so far, will underscore a sourer public mood and greater caution. That means no change in monetary policy for the foreseeable future.
The risks around the eventual Brexit outcome have risen. Mrs May's preference for hard-Brexit will be challenged by the DUP's soft-Brexit stance. And a challenging negotiation process increases the risk of ‘no deal’ and a chaotic exit from the single market. Time will tell.
Finally, where there is a political loser, there is usually a winner. While he didn't win the election, Labour leader Jeremy Corbyn was the clear winner on the day. He has consolidated his position as Labour leader and if things play out badly for the Conservatives, he may yet get invited to have a crack at forming a Government. If that is the case, some of Labour's less market friendly positions, such as the nationalisation of certain industries, would get softened by the realities of coalition negotiations.
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