United Kingdom: A big Conservative majority

The Conservative Party has won the 12 December UK general election emphatically, with a projected majority of 78 seats.

This means a significant reduction in uncertainty and makes a no-deal Brexit outcome on 31 January 2020 very unlikely. It suggests an economic rebound in the UK and upside for the pound sterling and UK assets. It also supports our broader pro-risk positioning and our positive view on the UK currency.

In their first December election since 1923, UK voters have handed Prime Minister Boris Johnson’s Conservative Party a landslide victory. At the time of writing, the Conservatives look set to win 364 seats in the UK House of Commons, giving them a working majority of 78 (according to BBC projections). This would mean the Conservatives have gained 47 seats compared to the 2017 general election. Labour looks set to win 203 seats, the Scottish National Party 49 seats and the Liberal Democrats 11 seats.

Large governing majority means Brexit deal can pass

This means that Prime Minister (PM) Boris Johnson and his Conservative Party have a large majority to govern. After the political volatility since the 2016 Brexit referendum, there should now be considerably greater political stability. Uncertainty over Brexit has diminished significantly. Parliament can now pass PM Johnson’s Brexit deal and his fiscal plans. Crucially, it also represents a tremendous personal mandate for PM Johnson. This will allow him enormous latitude to shape the UK’s future relationship with the European Union (EU) after Brexit, and means that he can overlook the very anti-EU wing of his party. Relative to the government’s current aim of a loose free trade agreement with the EU, the risk here is a closer relationship with the EU or softer Brexit.

Every single Conservative Party candidate at this election signed up to back PM Johnson’s Brexit deal. So with a working majority, that deal – at last! – is likely to pass Parliament in coming weeks. And the UK should leave the EU on 31 January 2020. After that, the UK is set to enter a standstill transition period until 31 December 2020 and negotiate a free trade agreement with the EU during that time. This transition can be extended – and we think it will. Otherwise, in the absence of a deal, the UK would abruptly leave the EU single market and customs union at the end of next year. We think the transition period will eventually be extended, with an agreement likely by the middle of next year. PM Johnson has proposed a Canada-style free trade agreement with the EU where the UK would leave its customs union and single market, which would imply a fairly hard Brexit. But the large personal mandate this election gives PM Johnson does give him room to push Brexit in a softer direction.

UK economy in for rebound

An end to uncertainty as well as a likely boost from fiscal policy under the Conservative government should mean that the UK economy rebounds next year after a few years of absolute and relative weakness. However, the ongoing tail risk of an abrupt end to the transition period could limit the upside somewhat.

We expect UK growth to reach an annualized rate of 2.0% by the end of next year, faster than the 1.3% recorded this year.

This should mean the Bank of England remains on hold in H1 2020 until the decision to extend the transition is made. After that, we expect a cautious rate hike in H2 once the rebound in growth materializes.

This should also be positive for the rest of Europe. The risk of a cliff-edge Brexit in January was also a source of uncertainty for many companies across the continent, especially in the auto sector. The elimination of that risk should help support the tentative improvement in economic indicators.

Positive news, at last, for UK currency

For UK risk assets, this outcome is clearly supportive. A combination of greater certainty on Brexit; the elimination of the risk of a market-unfriendly Labour government; and the prospect of fiscal stimulus should be positive for the pound.