A week is a long time in politics

05 Sep 2019

Philip Shaw

Chief Economist

After a busy week in Parliament, Investec FX dealer Kevin Musisi chats with Chief Economist, Philip Shaw, about the latest political movements and the impact on business.

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Investec Chief Economist Philip Shaw talks about political events this week with FX Dealer Kevin Musisi.

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Kevin Musisi: Good morning all, and welcome to the latest in our series of Brexit conference calls. I’m sure most of you listening have looked on in this weeks’ events in parliament with a mix of disbelief and astonishment.
 
Who would have foreseen the PM losing his first three votes in the house, sacking 21 rebel MPs, and Labour refusing to take the bait to back Boris Johnson’s call for a snap election? Only 24 hours ago, the markets were convinced that we would be imminently returning to the polls but, after yesterday’s votes, I’m struggling to get my head around what it means for Brexit.
 
Can we safely say no-deal is off the table? Will Johnson be forced to quit? If an extension is the more likely outcome, how confident can we be that all 27 member states will grant it? So there’s plenty to consider in the weeks and months that lie ahead, and luckily we’re joined this morning by chief Economist, Phil Shaw, to discuss in more detail. Welcome, Phil.
 
Philip Shaw: Thanks Kevin. Hi, good morning everyone. Thanks ever so much for joining our conference call. It’s been quite a few days, as Kevin has said, and never has Harold Wilson’s mantra that a week is a long time in politics rung any more true. I’ll try to give you a few hints and steers as we see it, but obviously the situation is very fluid. 
 
KM: I think, just to kick things of Phil, would you mind giving us a run-down of this weeks’ events?
 
PS: Yes. Events in politics in Westminster this week; Westminster sat for the first time after its summer recess, on Tuesday, and it was under the background that the Prime Minister had asked the Queen to prorogue parliament for a period of about five weeks, beginning at some point next week and ending with a new Queen’s speech on the 14th October.
 
To cut a long story short, those in parliament opposed to leaving the EU without a deal were very fearful that the Prime Minister was deliberately trying to cut debating time down to prevent parliament from taking that sort of action, to prevent him from doing that. And in our view, that was probably correct. And what happened on Tuesday was the opposition, helped by 21 Conservative rebels, passing a motion to take control of Common’s business yesterday.
 
Yesterday, the rebels forced a bill through, which forces the government to go back to the EU for a negotiation of an extension if a deal to leave the EU is not reached by the 19th October. That bill was passed in a series of rapid readings and committee stages yesterday, through the Commons; it’s now at the Lords’.
 
Now, what I’d say is that people say they’re passing a law to prevent a no-deal, you actually can’t physically do that. It’s a bit like passing a bill to prevent climate change; what you have to do is to take action to prevent what you don’t want happening from happening. So the extension is very much, three months beyond 31st October, to the 31st January, is designed for more negotiating time if a deal is not reached late in October.
 
Now, what followed then was that the government tried to engineer an election; it launched a motion to try and call an election on the 15th October, which is a Tuesday, but ahead of the EU summit on the 17th and 18th October. Now the problem there is that under the Fixed Term Parliaments Act, you actually need a two-thirds majority of parliament for that to become law, to get the election through. And that’s 434 MPs and, in fact, with Labour abstaining, they only got 298. 
 
So the situation is at the moment that there is no election. The bill is in the Lords. Now the government was thinking of trying to block it by filibustering it, by adding 90 amendments to it, to prevent it from becoming law by the time that parliament is prorogued, or suspended, next week. What they’ve agreed to do now is not to block it, to give it assent. It might take a couple of amendments, it will go back to the Commons then on Monday, but it will receive Royal Assent on Monday and therefore become law. 
 
Now what they’ve done that for is because they want a second bite at the cherry at calling an election. They can’t launch another motion to call an election under the Fixed Term Parliaments Act, so they’re trying to be a little bit sneaky. 
 
And what they’re trying to do is to pass what’s called a one-line bill. In other words, they’re drafting a very quick piece of legislation, a bit like the rebels did with the EU extension, and that would mean that an election would be called on the 15th October.
 
The critical difference between that and using the standard motion under the Act is that you only need a simple majority in parliament to do that. Now, again, further complications here; we had Philip Lee, the Conservative MP, walk the floor ceremonially, to join the Liberal Democrats.
 
So technically the government was then a minority of one, but as Kevin said earlier, the 21 expulsions, i.e. they’ve had the parliamentary whip removed from them, from the Conservative Party, means that the government is now technically a minority government by 43 MPs. 
 
So they are struggling to get the numbers to even get a simple majority to call an election. Now, it’s a very strange situation; yesterday, Boris didn’t get the election that his motion called for but that he allegedly didn’t want, and Corbyn didn’t vote for the election that he did want.
 
It’s a really bizarre situation in politics at the moment. Now, Labour does want an election, but it wants to hold the election after the 31 October, and that’s so they can say, number one, the government didn’t deliver Brexit on time.
 
Secondly, because the opposition fears that if Boris gets an election on the 15th and wins, then he could actually reverse the Act that’s going to be passed into Royal Assent on Monday and therefore we don’t have to have the three-month extension and, ostensibly, we could leave on the 31 October under that scenario, without a deal. So what we expect is cat and mouse when this vote comes to the Commons on Monday. 
 
I wouldn’t be surprised, to cut a long story short, if Labour throws in an amendment to say yes, we’ll have an election, but we’ll have it perhaps in early November.
 
I think the date might be the 7th November. And that’s when you’re starting to add up the position of individual MPs. Now that’s subject to lots of events happening between now and then, and obviously we’re going to be watching the situation very carefully over the weekend. 
 
KM: So it’s clear that we’re still on course for a general election and I guess what we had perceived was Boris Johnson’s tactic to goad the Labour party into an early election seems to have backfired. What options does Boris Johnson have now to keep no-deal on the table if this does come into Assent, but he’s not granted his wish by an early election?
 
PS: Okay; I’ll wind back a little bit and say that the idea of having no-deal on the table is effectively to say to the European Union, look, we are willing to leave without a deal. We are going to be prepared.
 
And it’s that idea that being able to walk away from the table, a credible threat, get some leverage over the EU 27 so that it makes compromises and so that we get a deal that the government agrees with and that it can get through parliament, and then we leave on the 31st with a deal.
 
Now, a number of Conservative MPs simply don’t trust Boris to do this, and the fact that he prorogued parliament for five weeks, having the day before said that it was just a conspiracy theory, really doesn’t help trust between the back benchers and the Cabinet.
 
So the first thing that he has to do if he wants to keep no-deal on the table is either get a deal with the EU, and avoid an election, or hold an election in mid-October and win it convincingly.
 
I think it’s a really tight call, next week, as to whether you might get an election on the 15th, or an election in early November, or you don’t get an election at all. It’s really tight, and just to make the point again, that the 21 rebels are hardly going to vote with the government if they have still been denied the party whip.
 
There’s got to be some conciliation in the Conservative Party for Boris really to stand a chance of getting his way there. 
 
KM: Okay, thanks for that, Phil. Clearly, things have changed between now and Monday, and Monday we had a government with a majority of just one, which has obviously changed and, along with the expulsion of 21 MPs. I think Monday, looking back at opinion polls, the Tories had a ten-point advantage; how does that look now?
 
PS: The Conservatives, on average, do have a ten-point advantage over Labour and, ordinarily, you would say that that would be enough to give the Conservatives a very healthy, if not quite a stonking majority in parliament, were there to be an election.
 
It’s so much more complicated than that this time, though; the first factor is that you look at opinion poll leads and what you typically do is you say right, if the swing in each constituency was the same, what would be the parliamentary make-up? 
 
But that’s always a little bit of an assumption, but even more so in these days where the divisions in the country are not just Labour/Conservative, they’re also leave and remain.
 
And several complications I can talk about; the first is that the Tories would come under a lot of pressure from the Liberal Democrats in southern England particularly. Just to give you an idea of the actual percentages; the Tories are on about 34 per cent, Labour on about 23 per cent, the Lib Dems about 18 per cent, the Brexit Party 15 per cent, on average; of course it varies from poll to poll.
 
Now, the Lib Dems would pick up quite a few Tory seats in southern England. If the UK hasn’t left the EU, the Brexit Party could be expected to maintain its share of the vote, at 15 per cent, and therefore would probably squeeze the Tories in a number of key marginals. Another point is that the Scottish Conservative leader, who’s very popular north of the border, Ruth Davidson, has resigned. And polls are showing that the SNP could take the great majority of the Tories’ 13 seats there. And, of course, if you’ve got 21 MPs that have been expelled from the party, they could well stand as independent Conservatives, or even Lib Dems, and hurt the Conservatives further. 
 
So, our guess would be that if you had an election on the 15th October, providing Boris doesn’t lose his lead in the polls as Theresa May did two years ago, that the Conservatives probably would win a majority, but that’s difficult to see unless those 21 rebels are brought back on board. 
 
KM: And if Labour gets their way and we head to the polls in November, is it likely that Boris Johnson will be leading the Conservative charge in the election?
 
PS: It’s very difficult to know whether Boris would; I think in general terms, what would happen if we haven’t left, is that the Brexit Party would get a bigger share of the vote. You could see them with perhaps a few seats, costing the Conservatives.
 
It would undoubtedly scupper the Tories’ hopes of getting an overall majority. Now, whether Boris leads the party there or not, I’m not convinced that there is really time to elect a new leader. You’d need an interim leader. Very, very difficult to say. 
 
Boris has said that he will not demand an extension from the EU at any price, but of course all politicians can change their minds and go back on things that they’ve said. So I don’t know; perhaps it’s safe to say that Boris would remain the leader. On a practical perspective, thus far, he has been the most popular Conservative politician, at least with the electorate as a whole. 
 
KM: So I guess summarising events, and if it does transpire that Boris is forced to seek an extension to Article 50, how does that leave us? Will the next three to six months achieve anything?
 
PS: Well, frankly this would be a big exercise in can-kicking. In our view, leaving the EU without a deal would herald chaos on the economy, particularly in terms of exporting and importing firms.
 
I know we’ve discussed this many times in discussions and in calls such as these; but what business needs is clarity. And simply extending by three months prolongs the agony, it’s another part of the cascading series of cliff edges. 
 
We’ve already seen business investment very weak over the past year and a half, and now that softness in the economy seems to be permeating to other areas of spending as well.
 
Now, part of it is the global background, but some of it is undoubtedly concerns about Brexit as well. And business, and I’m sure the people on the line will agree with this wholeheartedly, needs some clarity. This needs to be resolved. 
 
KM: And can you give the callers on the line maybe an idea of if we’ve revised our forecasts?
 
PS: Well, we’ve been looking at our forecasts, but the trouble is you’ve got a series of events which are very difficult to call, whether we get an election or not, and what the likely result is, being two key examples.
 
But to give you an idea of our current foreign exchange forecasts; we had thought that fears of a no-deal would put sterling under pressure, which certainly at the beginning of the week was the case. 
 
Our existing target against the dollar is 118, and against the euro around 105; now, if there’s a chance that we get an election, then arguably you could say well, no-deal goes back on the table.
 
But if the election, you think, is going to take place after the 31 October, then presumably we’ve secured the extension, but don’t forget, all 27 European Union countries have to agree to that, and it’s not necessarily a done deal.                    
 
But if you think the election is going to be on the 7th November, then that short-term pressure, at least, on sterling, is taken off, and indeed we’re trading at around the 122.40, 122.50 level at the moment, on hopes that we don’t leave without a deal at the end of October.  
 
KM: We had a couple of questions that were submitted ahead of this call so, Phil, if you don’t mind, I’ll read one or two of them and if you could reply as well, that would be great. Question one was; I buy dollars and euros and was shocked to see sterling-dollar trading in the 119s on Monday, but sterling has held up comparatively well against the euro. Is there a reason for this resilience?
 
PS: Yes. What we’ve seen, and thanks for the opportunity, Kevin, to answer that one, I perhaps should have explained a little bit more after the last question. The euro has been very soft; we’ve got a European central bank meeting next week, where we’re likely to see the ECB cut rates again, further into negative territory, and re-start quantitative easing. And that’s putting the single currency under pressure.                   
 
It’s pretty clear that the major economies in the zone are suffering; we’ve had German manufacturing orders data overnight, down, I think, 2.7 per cent on the month in July. But that general situation has put the euro under pressure and that’s why sterling has at least held up relatively well against the euro, as opposed to sterling against the dollar.                    
 
Overnight, it’s been revealed that Washington and Beijing are going to re-start trade talks in early October and there are hopes that we may get progress on dismantling some of the new tariffs, and that we’ll begin to see trade tensions ease. And that was reflected in big gains in Asian stock markets, Wall Street looks like it’s going to open up and, indeed, the euro is making some gains against the US dollar. 
 
It seems strange and counterintuitive that what’s better for the global economy makes the dollar less attractive as a safe haven. So  if you see that trend continuing, then we would see perhaps the euro reaching about 112 over the coming weeks, against the US dollar, from 110 now. Which is why I was suggesting that the pound’s gain against the euro might be relatively modest compared to its gain against the dollar over the next few weeks. 
 
KM: Great, and just, I guess, a connected question, and you touched on it there; clearly, all our eyes and minds are focused on Westminster, and you’ve obviously touched on US trade also with China, so is that alongside any other global events that we should be paying close attention to?
 
PS: There’s a lot going on in the world at the moment and it’s very tempting to have your eyes fixed on Westminster and Brexit, but clearly there are a number of different things going on from a global economy and, indeed, a global markets perspective.
 
The most important thing is whether we get some progress in dismantling the tariffs which both the US and China have loaded on each other’s goods.
 
Because what we’re seeing at the moment is world trade actually falling; it’s not even world trade growth, it is lower than it was a year ago. Global economic growth seems to be heading on a course to be even below three per cent this year, and that’s having a marked effect on the UK economy and UK business, as well as just on global markets.                    
 
And, also, what happens with the eurozone economies as well; we’re very likely, as I’ve said, to see the ECB re-start asset purchases or QE next week. That’s given a big boost to global markets, and some boost to European economies as well, and that’s important in the context of the UK as a trading hub in Europe generally.
 
KM: Okay, thank you once again, Phil, for your time this morning, and for helping demystify events in Westminster this week. I’m sure it’s been illuminating and there are definitely more twists and turns to come on the horizon.
 
And thank you all for taking the time on the lines there, to dial in and listen. I hope you’ve found the call useful. It’s clear that we’re in uncharted waters, so if you have any questions over the coming weeks, please keep in contact with your Investec dealers as we’re well-placed to give you a steer on market sentiment. 
 
If there are any concerns around hedging over Brexit, or into 2020, there are a number of strategies that our corporates are using to manage the upcoming risk and, again, our dealers are on hand to share these ideas and discuss in more detail. Otherwise, I want to wish you all a pleasant day and best of luck in the weeks and months ahead.Thank you once again.

About the author

Philip Shaw

Philip Shaw

Chief Economist, UK

Philip graduated with an Economics degree from Bath University and a master’s in Econometrics from the University of Manchester. He is a regular commentator on the economy and financial markets in the press and on TV. Philip joined Investec in London in 1997 and heads up the Economics team there.

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