Tory landslide
If the exit polls are anywhere near correct, then Boris Johnson and the Conservative Party just managed to get the biggest majority since Margaret Thatcher and the Labour Party has the worst result since at least 1983. It is one of the oddities of the British electoral system that Boris Johnson can get about the same vote share nationwide as Theresa May did two years ago but win 50 more seats in Parliament. But I spare my international readers with the details on how this can happen. Let’s just say that there is a reason why election polls in the UK have about two to three times the polling error than US polls.
Exit polls may be wrong, but I would be amazed to see them so wrong that we wouldn’t wake up in the morning with a solid Tory majority.
So, before I go to bed, a few thoughts on the election.
The good:
The Conservative Party now has a solid majority in Parliament which means it will be easy to get the withdrawal agreement passed through Parliament and the UK will formally leave the EU on 31 January 2020.
For the economy, this is great in the short term because it removes the uncertainty that has held back investments in recent years. According to my estimates, private investments are about 10% behind the level they would have been had the UK not decided to leave the EU in 2016. We should expect strong economic growth in Q1 2020 in the UK and a big push for investments and the domestic job market. Given that this reduced uncertainty is positive for Sterling, inflation may be well-behaved in the next three to six months so that there is no immediate need for the Bank of England to hike rates.
We should also expect utilities, infrastructure and other stocks to rally that would have suffered under a Labour government. Also, domestically oriented small caps should outperform large caps while Gilts and in particular inflation-linked Gilts should suffer.
Jeremy Corbyn and the left-wing of the Labour Party will (hopefully) be history. I cannot see how Corbyn and his allies can stay at the helm of the Labour Party after such a massive defeat. This opens up the possibility for a more electable and centrist leader who can shift the party overall back to the centre.
A Scottish referendum seems unlikely to materialize now. The Tory majority is so stable that there is no need for Westminster to agree to another Independence Referendum.
The best:
In an ideal world, a large majority for Boris Johnson could allow him to ignore the more radical voices in his party and shift the Conservative Party more to the centre. However, the fact that Johnson won this landslide victory after removing the whip from the centrist members of his party (i.e. kicking them out of the party, for my international readers) tells me that he will likely double down and shift his position more towards a hard Brexit if need be. Effectively, he can do whatever he wants now and is free to appeal to every populist tendency in his party.
This clearly was something like a second Brexit referendum. While Labour tried to shift the focus on domestic topics, this election was dominated by one topic and one topic only. This means, that while Labour has suffered badly, it could come back just as quickly at the next election in five years, simply because by then, the topic will not be Brexit but the economy and other domestic issues. And if the Tories get tempted to go for a hard Brexit or a limited trade deal with the EU, then the sour state of the British economy could well turn the needle against them quickly. As I said in my last post, behind the numbers of today there is a fundamentally divided public and no solid majority for either centrist of populist policies, Conservatives or Labour.
The bad:
Politically, this is only the first step. After the withdrawal of the UK from the EU, the new government will have to negotiate the future relationship between the UK and the EU. Boris Johnson expressed his desire to get to a Canada-style free trade agreement with the EU, but that won’t be easy to do. At the very least, it will likely take much longer than the twelve months we have until the UK leaves the EU for good. It is entirely possible that the EU will continue to play hardball with the UK in which case Boris Johnson might be tempted to leave the EU without any trade deal or only a very limited one. So, expect this relief rally to be rather short-lived. At the latest in the new year, all eyes will be on the negotiations about the future relationship with the EU which will introduce a lot of uncertainty again into the market- with negative effects for Sterling and UK stock markets.
Ironically, in his efforts to strike new trade deals once the UK has left the EU, Boris Johnson will be hindered by the fact that the WTO is currently unable to resolve any trade issues in its appeals courts. The United States government has blocked all nominees to the WTO appeals courts and now there is just one judge left, which is not enough to run the process. This means that if there is a trade dispute, the UK will have to negotiate a solution bilaterally with the country it has a dispute with. This means that in the end, the bigger economies like the United States, the EU or China can dictate their will to the UK and the UK has no recourse. It is going to be their way or the highway for the UK.
If Jeremy Corbyn steps down as leader of the Labour Party, the new leader will again be elected by the members of the party. And the base of the Labour Party is dominated by Corbyn supporters so it could well be that the Labour Party will not learn from today’s election result and not shift to the centre at all. Worst case it might radicalise even more and, in the process, abolish itself entirely on a national level.
The ugly:
Jacob Rees-Mogg, Chancellor of the Exchequer.
If Boris Johnson is taking the country towards a harder Brexit, Scotland and the SNP will scream for another Independence Referendum. Since Westminster has no incentive to allow such a referendum or implement the result, we could see increasing unrest in Scotland.
Source: The Telegraph.