Thoughts on the UK general election
* Boris Johnson’s 80-seat parliamentary majority has transformed the UK political scene. What does it mean for business and the economy? As always what follows is a personal view.
* The political uncertainty of the last three years has weighed on business confidence. Our survey of UK chief financial officers (CFOs) has revealed persistently high perceptions of external uncertainty and low levels of risk appetite. Brexit has dominated the list of CFO worries since the referendum and business investment has slumped. Uncertainty has driven the pound lower, raising import prices and squeezing consumer spending.
* The UK’s post-referendum slowdown has not been due solely to Brexit. The global economy is slowing and, in the euro area, the UK’s largest export market, activity has slowed rather faster than in the UK in the last three years. Nonetheless, home-grown uncertainties have played a major role.
* Some of those uncertainties are reduced or even eliminated by the outcome of the election.
* The prospect of sweeping change to the current business environment under a Jeremy Corbyn-led Labour government has disappeared. An 80-seat majority should be more than enough for a five-year Parliament – a return to a normal political cycle after three general elections in four years. And with the government set to re-introduce the Brexit bill this month, and formally depart from the EU at the end of January, there is clarity on the fact, manner and timing of the UK’s official withdrawal from the EU.
* That leaves open the vital question of the UK’s future trading relationship with the EU. Mr Johnson said during the campaign that he wanted the UK to leave the EU customs union and single market and enter a new relationship with the EU on 31 December 2020. This is widely seen as a demanding timetable, raising the question of whether the UK, or possibly, the EU, might seek an extension.
* Although the UK’s future trading relationship with the EU is a major area of uncertainty, its significance has the potential to be dulled by time and detail. In Saturday’s Financial Times, the paper’s Gideon Rachman advised Mr Johnson that his, “real goal should be the banalisation of Brexit. He [Mr Johnson] must turn the negotiation of a new trade deal with the EU… into a boring, bureaucratic process that mostly stays out of the headlines”.
* As a number of commentators have observed, Mr Johnson’s parliamentary majority gives him the authority and the votes to aim for a closer future relationship with the EU should he want it. With a greatly reduced risk of backbench revolts or challenges from other parties Mr Johnson is less constrained on European policy than his two predecessors.
* Domestic political uncertainty will, of course, persist, though in different forms. In the wake of its strong showing, the Scottish National Party has claimed the authority for a new independence referendum, a call rejected by the Conservatives’ Michael Gove. The significance of Northern Ireland returning more nationalist than unionist MPs for the first time is less obvious. But following the general election, the main players in the Province seem ready to start negotiations on a restoration of the power-sharing assembly.
* Financial markets reacted positively to the election result, with the pound and UK equities rallying. Surveys will provide the first indication of whether the election has altered business sentiment. (We are opening the Deloitte CFO survey to CFO respondents today and will publish the results in mid-January.)
* Brexit may have been the dominant theme of the Conservative campaign but proposals to increase public spending also featured prominently. The planned increase in spending is a fraction of what the Labour Party and the Liberal Democrats advocated, but it would be enough to put real-terms public expenditure on an upward trajectory after ten years of austerity. As well as increased spending on schools and the NHS, the Conservatives plan to raise infrastructure spending to levels not seen for 40 years. For the first time in several years fiscal policy is likely to provide some positive impetus to UK growth.
* Yet this is no spending boom and fiscal policy remains constrained. Despite a decade of economic growth and public sector austerity the UK is running a sizeable budget deficit. If the chancellor is to stick to his new rules, funding current spending from tax receipts and borrowing only to invest, there is little scope for further increases in public spending or tax cuts.
* One immediate decision facing the chancellor is to select a successor for Mark Carney who is due to step down as governor of the Bank of England next month. The first task for the new governor will be to assess whether the UK should follow the US Fed and the European Central Bank in easing monetary policy.
* In the last three years Brexit has tended to crowd out other issues. Two, in particular, seem likely to move centre stage now. The near stagnation of productivity since the financial crisis is arguably the UK’s greatest economic challenge. Without a recovery in productivity it will be impossible to sustain growth in incomes or meet voter aspirations for public services. And while Brexit has been taken most of the blame for the softer UK growth, the reality, as we have noted, is Britain’s slowdown is part of a global slowdown. What happens to the global economy in 2020 will be one of the main determinants of what happens in the UK.
* Our last observation relates to the opinion polls. The last round of opinion polls before election day came pretty close to calling each party’s share of the vote. Where it became difficult was in translating vote shares into parliamentary seats. YouGov’s MRP poll accurately forecast a hung parliament in 2017 but their poll released last Tuesday predicted a 28-seat Conservative majority, less than half the actual outcome.
* In the run up to election day my unscientific straw poll of colleagues, clients and friends suggested most expected a 20–30 seat Conservative majority – though understandably few did so with much conviction. With hindsight many of us probably placed too much weight on factors including tactical voting, high voter registration and high voter turnout which, in the end, didn’t help Labour and the Lib Dems as much as might have been expected.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 1.8% at 7,367 on the back of the decisive Conservative victory in the UK parliamentary election.
Economics and business
* The US and China announced the agreement of a ‘phase-one’ trade deal, which they will sign “as quickly as possible”
* The deal includes a reduction in existing tariffs and the cancellation of new tariffs scheduled for 15 December, conditional on China increasing its purchases of US agricultural goods
* The Appellate Body of the World Trade Organization ceased to function after the terms of two members expired and were not replaced owing to a US veto
* The Chinese government has ordered the removal of foreign computer hardware and software within three years. This follows a US policy of discouraging the use of equipment made by the Chinese telecommunications company Huawei
* Japan is considering offering a tax break to telecommunications companies that do not invest in Huawei 5G equipment
* The US has imposed new sanctions on an Iranian airline and shipping group over alleged involvement in the country’s missile programme
* Leading US lawmakers reached a tentative agreement to fund the federal government, avoiding the risk of another shutdown ahead of a 20 December deadline
* US House Democrats announced two articles of impeachment to be voted on this week. If the votes pass, a Senate trial will follow
* US House democrats reached agreement with president Donald Trump on the North-American free trade agreement USMCA, raising hopes the deal will be approved
* Inflation in China hit an eight-year high, driven by high pork prices
* Inflation in the US remained muted, hitting 2.1% in November despite a tight labour market
* The US Fed voted to keep rates on hold and indicated it planned no changes in 2020
* The ECB voted to keep rates on hold, indicating there will be no rate rises unless inflation picks up
* The UK economy did not grow or contract in October, recording its slowest year-on-year growth since 2012
* Industrial production in the UK fell by 1.3% in October versus a year earlier, doing nothing to assuage fears of an entrenched manufacturing slowdown
* The ZEW survey of German investor sentiment has returned to positive territory and hit its highest level in 22 months
* UN climate talks in Madrid ended with no agreement on a global carbon market, a key outstanding part of the 2015 Paris agreement
* A shipping company has been including in a ranking of Europe’s ten largest emitters of carbon dioxide for the first time, reflecting increasing scrutiny of the sector
Brexit and European politics
* In the UK parliamentary election, the Conservative Party won 365 of 650 seats, its best performance since 1987 and a 49-seat increase from the previous parliament
* The Labour Party won 202 seats, a 60-seat decline and its worst result in 84 years. The Scottish National Party won 48 seats, a 13-seat improvement and the Liberal Democrats won 11 seats, a two-seat drop
* The European Commission published its “Green Deal for Europe”, a policy package to make the EU carbon-neutral by 2050. Frans Timmermans, the Commission’s executive vice president in charge of the Green Deal, warned that the EU will impose a carbon border tax if other leading economies fail to slash emissions
* Russia has been banned from competing in major sporting events for four years following an alleged cover-up of wide scale doping
And finally… linguists found that members of a research station in Antarctica were so isolated that their pronunciation began to converge, providing evidence of the beginnings of a new common accent – de-polarisation