The UK Election Reaction: The Final Brexit Chapter?

13 Dec 2019

Philip Shaw, Victoria Clarke and George Brown

Investec Economists

The general election has resulted in a resounding victory for Boris Johnson, with the Conservatives easily surpassing the 326 mark required for an effective majority in Parliament.

At the time of writing they had won 365 seats, easily in excess of the 317 secured in the 2017 election. This would be the largest Tory majority since 1987 under Baroness Margaret Thatcher, giving Mr Johnson the power to pass his Brexit deal and more broadly his government's mandate though Parliament.
 
After accounting for the speakers and Sinn Féin, neither of which participate in Westminster voting, the working majority is 7 seats larger.
365
The number of seats won by the Conservatives
Other parties have been left licking their wounds, with Labour having suffered its worst performance in living memory after acquiring just 202 seats, a loss of 59 (discounting Speaker Lindsay Hoyle’s seat).
 
The Liberal Democrats, meanwhile, have seen their nascent leader Jo Swinson ousted in East Dunbartonshire. The party has won 11 seats, down 1 from 2017. Meanwhile, Deputy Leader of the Democratic Unionist Party (DUP), Nigel Dodds, has lost his Belfast North seat, whilst the party also lost Belfast South to leave it with 8 MPs. Going against the grain has been the Scottish National Party (SNP), who now have 48 MPs after securing an additional 13 seats. 

What does it mean for Brexit?

It goes without saying that Boris Johnson will remain as Prime Minister. With his new sizeable majority, he will be well placed to deliver on his “Get Brexit Done” election slogan. For Brexit this means that Mr Johnson will press ahead to get his “oven ready” Brexit deal through Parliament, where he now has well in excess of the necessary numbers. This will see the UK leave the EU on 31 January 2020 and enter a transition period which will last at least until the end of next year.
The task that Prime Minister Johnson will then have to undertake is to negotiate the UK-EU trading arrangement after the transition period. Here Mr Johnson has made a manifesto commitment to pursuing a Free Trade Agreement (FTA) and not to extend this transition period beyond the end of 2020. But we judge that this would require a herculean effort given the tight timeframe, even setting aside any agreement on customs arrangements and the all-important services sector.
We cannot rule out the possibility that Mr Johnson, unhappy with the trade offer on the table from the EU, eventually rejects an agreement altogether and pursues a Brexit on WTO terms
Consequently we expect that the Prime Minister will be forced into seeking a one-year extension to the transition period. While this may upset the eurosceptic wing of his party, the large majority that Mr Johnson will command means that he is likely to be able to withstand any rebellion from the self- roclaimed ‘Spartans’ in his party.
Though the details of any future trading arrangement remains vague, we also cannot rule out the possibility that Mr Johnson, unhappy with the trade offer on the table from the EU, eventually rejects an agreement altogether and pursues a Brexit onto WTO terms after the transition period ends.
 
As such we are firmly of the view that some Brexit uncertainty will persist throughout 2020. On the domestic stage, however, the Prime Minister does have in his favour his new sizeable parliamentary majority, such that he can, in negotiations, convince Brussels that he has the domestic backing for any course he pursues.

Johnson's policy pledges

With Brexit still a major undertaking, Mr Johnson’s policy agenda is still likely to be restrained. However, the solid majority increases the Prime Minister’s prospects for passing any legislative changes. We would therefore be surprised if Mr Johnson does not use this opportunity to try and shift the policy platform further in line with his political objectives, beyond what is detailed in the manifesto.
 
This includes a number of policy pledges, some of which represent a continuation and commitment to deliver on earlier pledges, such as those made in the Spending Round earlier this year. Other new pledges may be tackled at the upcoming Budget, which looks set to take place in late February. Key pledges on the tax front, already known, include a promise to raise the threshold of employees’ National Insurance contributions to £9.5k next year alongside a pledge to cut the burden of taxation on business. A first step listed here is a pledge to further reduce business rates for retail businesses. 

What's happening in the near future?

Looking ahead, the Prime Minister is expected to lay out his legislative agenda in the Queen’s Speech on Thursday. He is then likely to bring the Withdrawal Agreement Bill in front of the House of Commons before the Christmas recess, perhaps as early as Friday according to some reports.
 
Given the Conservatives’ sizable majority  and the implicit mandate this provides for Mr Johnson’s Brexit deal, its ratification seems a near certainty and therefore the UK is set to leave the EU on 31 January. The UK will then enter the transition period and begin the next phase of negotiations with Brussels over the future trading relationship, although perhaps not  in earnest for a couple of months as the EU27 agrees a collective position.
We therefore maintain our view that sterling is likely to trade a bit lower again, particularly by mid-year as the deadline for the Brexit transition  period approaches.
The result of a Conservative majority was anticipated by investors, but the extent of the win was not. For now, sterling is being lifted by the election outcome providing a clear path to Mr Johnson’s Brexit plan passing Parliament. However, as we have highlighted, this does not eliminate all uncertainty with the open question over future trading arrangements persisting after the transition phase.
 
We therefore maintain our view that sterling is likely to trade a bit lower again, particularly by mid-year as the deadline for the Brexit transition  period approaches. Additionally, any SNP push for another independence referendum could add further downward pressure. 

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