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UK Economic Outlook Takes a Hit from Hung Parliament

11th June 2017 | Dubai

 

By Dr. Marie Owens Thomsen, Global Head of Economic Research for Indosuez Wealth Management, Global Wealth Management Division of Credit Agricole Group

 

 


This election was Ms Theresa May’s to lose, and she did. The blame must be put squarely on her as the campaign was centered on her person as the sole “saviour” of the UK post-Brexit. Clearly, the population was not convinced. Moreover, the population seemingly wants to put Brexit behind it, in spite of the fact that it still lies firmly in the future. Centering the campaign on this issue failed to inspire, and voters were much more moved by the issues of jobs and healthcare championed by Labour’s leader Mr Jeremy Corbyn whose party went on to capture 29 new seats. As the voting system is first-past-the-post and not proportional, it was possible for the Conservatives to give up seats in spite of increasing their share of the vote by 5.5%. Preventing the Tories from rejoicing over that fact, the Labour Party saw even greater gains in their share of votes which rose by 9.5%.

 

The second big loser was the Scottish National Party which ceded 21 seats. This strongly suggests that the population is in no mood to revisit the independence issue.

The third victim was UKIP which was ejected from parliament in yet another sign that Brexit is no longer a priority even to the roughly half of the population that voted in favour of leaving the EU in 2016.

The Liberal Democrats gained four seats but they too can be considered to have done poorly, again because of the failure to make Brexit a key issue, as their key point in this campaign was to offer British voters a second referendum on the issue. Many had expected the Lib Dems to do even better in this election on that score.

The Green Party lost 2% of the vote compared to 2015 but managed to hang on to their seat in parliament.

In Northern Ireland, Sinn Fein performed strongly.


All in all, there was only one big winner in this election and that was the Labour Party, but voters nevertheless had doubts about that party’s ability to govern and the result is a hung parliament with no party having cleared the 326 seat hurdle for an outright majority. This happened last in 2010. As a result, uncertainty has increased, instead of decreased as was Ms May’s aim.

 

  • The Conservative government remains in office, unless Ms May resigns, until it is decided who will attempt to form a new government.

 

  • Mr Corbyn could conceivably become the next prime minister, although we still think this is a low-probability scenario.

 

  • The next government could be either a coalition, or a minority government, either Conservative or Labour.

 

  • Ms May gets the first chance to form a government as her party is the largest in parliament.

 

  • If she fails, the turn goes to Mr Corbyn.

 

  • There is no official time limit on forming a government. In 2010 it took five days. This time it will probably take longer.

 

  • The first upcoming key date is 13 June when parliament reconvenes.

 

  • The Queen’s speech is scheduled for 19 June. Normally the Queen authorises the formation of government at this event. If there is still uncertainty at that point, she might not deliver this speech in person.

 

  • The negotiations with the EU over the terms for leaving the union are due to begin on 19 June.

 

  • Forming a coalition will be difficult on both sides of the political divide as the Lib Dems have said that they will not enter a coalition and Mr Corbyn has also said he would not do that. The Scottish National Party has kept its options open on both sides, and Northern Ireland’s Democratic Unionist Party has said it would back the Tories. The Green Party has said it would support Labour on a vote-by-vote basis.

 

  • Unless some of these parties changes their tune, a minority government would be the most likely.

 

  • Such a government could face challenges at each and every vote to cobble together the support needed in order to pass legislation.

 

  • However, the opposition might also be fragmented, allowing a minority government to survive for some time, although most unlikely for the five years until the next scheduled elections.

 

  • Two-thirds of MPs have to vote in favour of early elections for that to happen.

 

  • From any dissolution of parliament, 25 working days have to pass until an election is held.

 

  • If a no-confidence vote is held and the sitting PM loses it, there is a 14 day grace period during which the ruling party can attempt to win another confidence vote.

 

The outlook for the economy takes a hit from this outcome. GDP growth will arguably be slower as uncertainty weighs on investment and consumption, and a weak future government is likely to find it difficult to push through significant reforms. Risk-averse investors might wish to stay away until the horizon clears somewhat. That said, there are always opportunities in volatile markets and the UK is still an economy of 65 million people and it will not implode – rather, there might simply be better investment opportunities elsewhere.

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