Britain’s Dec. 12 general election has the potential to move markets

You could be excused in the U.S. for overlooking the fact that the U.K. is going through a snap election campaign.
Any such coverage of the U.K.’s upcoming election is being drowned out by the U.S. media’s hourly reporting of the varying prospects for the numerous Democratic contenders and the daily tussles between lawmakers and the current incumbent in the White House – all this before the 2020 presidential election year has even started.
British general elections rarely raise much interest outside the country, although Britain’s “first past the post” election system means the country has only experienced one peacetime coalition (2010–2015) since the Lloyd George ministry ended in 1922.
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Yet even with the potential such a system holds for more extremist parties to take power, the Brits have rarely voted in parties radical enough to cause ripples outside their own borders.
Dec. 12, however, may be a different matter.

Boris Johnson, the newly elected — at least by his party if not the country — prime minster is taking the country to the polls to secure a mandate for his version of Brexit, called the Withdrawal Agreement.
Or, that is what he thought.
What has transpired in the weeks since the decision is that most of the country is heartily sick of Brexit and good old-fashioned domestic issues are coming to the fore as the deciding factors in the (ever unreliable) weekly polls.
Who can throw the most money at the National Health Services, the police, education, etc., is getting 10 times more air time than the terms of Boris Johnson’s withdrawal agreement, which is strange because the U.K.’s ability to pay for all these promises will depend a great deal on its economic health over the next 5-10 years. In turn, that will be significantly impacted by what kind of exit deal the U.K. gets.
As with the original leave referendum some 3 1/2 years ago the public’s position is being formed on the basis of more unknowns than knowns and, hence, on the question of Brexit, remains a largely emotional decision.
According to analysts, there are a number of possible outcomes to the upcoming election.
The Conservative party, currently the front-runner, could win a majority. In this case, assuming Boris Johnson gets his agreement through parliament with his new majority, the U.K. will leave Jan. 31, 2020, and spend the next 12 months negotiating the terms of a trade agreement (notice it won’t be a free trade agreement).
Many believe this is unrealistically short and by pinning his colors to the mast for a firm deal by the end of 2020, Johnson is potentially lining the U.K. up for another re-run at a hard Brexit — that is, one with no agreement and revision to WTO rules.
Still, the markets prefer this option and the pound would be expected to perk up to 1.33 against the dollar and 1.19 against the euro if the Conservatives were to win an outright majority.
The next possibility is a Labour majority or a hung parliament with a significant enough stake for the socialists that they could call the shots.
Depending on what of the many giveaways and proposed tax rises a Labour government actually imposed should it get in power, the cost to the U.K. economy could be in the region of £83 billion ($108 billion) annually within a few years. As a result, the currency markets are predicting 1.375 for the dollar and 1.22 for the euro on the basis interest rates would have to rise to secure that level of government borrowing.
Some economists favor a Labour win purely on the basis it promises to involve a high level of investment, but it’s the damage the tax rises and nationalization program would have that worries most.
Remain voters and some Leave (those not in favor of a hard Brexit) could be attracted to Labour’s position regarding Europe. However, the party is campaigning to renegotiate (yes, yet again) a new agreement, essentially keeping the U.K. in a form of free trade, open borders, and close cooperation with the E.U. It would be a high economic price to pay to remain in or close to the E.U., though.
The third party, the Liberal Democrats, are expected to pick up more seats particularly from those who would like to remain or want to have a second referendum on the topic. The Lib Dems, however, are thought unlikely to be able to form a government.
If they had sufficient seats to be a significant member of a coalition, they could derail the Conservatives’ negotiated withdrawal agreement, throwing the whole process back by months.
In many ways, this is the market’s least attractive outcome, as they want certainty (however disruptive to trade it could be). The pound is expected to fall back to 1.22 against the dollar and 1.11 against the Euro if that happens.
Finally, the nightmare scenario is a hung parliament with no chance of passing the Withdrawal Agreement — a not impossible outcome.
In that case, the pound could collapse to 1.12 against the dollar and 1.04 against the euro some economists suggest, as the country would be plunged back into uncertainty and, by default, probably a hard Brexit at the end of January.
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The takeaway?
Cover currency exposure, the range of possibilities is painfully wide and the recent run-up in the pound from 1.21 a month ago to 1.29 now on the possibility of a Boris win has already caught many by surprise.

One Comment

  • With the 2020 election right around the corner our nation is divided over feelings. We should focus more on economics for our future.


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