Forecasting Eye 

 

Finally, after months of resisting, Parliament gave in last week and permitted the Prime Minister Boris Johnson to hold an election on 12 December. We sketch out below the likely consequences of different results for the UK economy.

 

It may surprise some that despite a Conservative lead in the opinion polls that has remained stubbornly between 10 and 15% for the last few weeks, the bookmakers only give a the Conservatives a 50-50 chance of winning a decisive majority and give a roughly equal probability to a hung Parliament. This is for three reasons. First, the Tories blew a 20 point lead in the last election in 2017 and cannot be guaranteed not to do so again. Second, although the polls show the Tories ahead, in reality they show the nation divided roughly 50-50 on Brexit which is likely to be the key issue in the campaign. Tactical voting by those opposed to Brexit could offset the apparent Tory lead. Third, the UK’s first past the post system is likely to throw up anomalies and it appears that quite a lot of the Tory support might be used up in piling up huge majorities in seats which they would win anyway.

 

On balance I give a Tory victory a higher probability than the bookmakers, but of course economics – not politics – is my speciality!

 

If the Tories win a decent majority of at least 30 seats, what will happen? First, it is likely that the Prime Minister’s Brexit deal with the EU will go through and the UK will leave the EU at some point in the next few months. However, this is not the end of the matter, since the Withdrawal Agreement is just the start of the horse trading on the final trade deal with the EU. We pointed out two weeks ago that this would be likely to take much longer than the 14 months allowed for in the Withdrawal Agreement and that the likely outcome would be something based on Canada’s deal with the EU but probably with more substance on trade in services. The key issues are likely to concern the trade talks that will be proceeding in parallel with the US, China and India and the extent to which they cut across each other.

 

On other policy, the Tories would be likely to run a loose fiscal policy, possibly with some inflationary risks, though in a deflationary world these risks are probably low in the short term. Interest rates will stay low. Taxes will be held down but are unlikely to be cut much, but public spending on services and on infrastructure looks set to rise. The markets have probably priced much of this in so we do not expect a large sterling bounce.

 

There is a surplus of inventory in the UK economic system that would need to be run down but after that it is likely that some of the business decisions that have been put on ice during the Brexit uncertainty will be unlocked and by late 2020 growth should be rebounding as long as the international economic situation is stable. Broadly, we expect the service sector to do well but manufacturing may be held back by Brexit.

 

If there is a hung parliament with Labour the largest party on the anti Tory side, the probability is that the Remain coalition will organise a second referendum. It is quite possible that this will go a different way from its predecessor. It is likely that taxes will rise sharply and that public spending will be significantly higher than even the raised level that we are predicting for the Tories. The public sector will do well while manufacturing might be boosted if Brexit is put on ice. Though high taxes would deter inward investment.

 

So unusually, it appears that the choices made in the coming election will have an impact on the shape of the economy. On one side a stronger service sector, on the other a stronger public sector. Either way, the election matters.

 

Contact: Douglas McWilliams; dmcwilliams@cebr.com ; 07710083652