Another Brextention and election?

10 Sep 2019

Philip Shaw

Chief Economist, UK

Last night UK Prime Minister Boris Johnson moved the UK more firmly onto an election footing when he stated that he intends to table a motion in the House of Commons today on holding a General Election, probably in mid-October. 

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This arose as the Commons, with the help of 21 Conservative rebels, passed a motion to put together a rapid bill to force the government to seek a further three month delay to the UK’s Brexit date of 31 October.
The vote was passed by 328 votes to 301 and MPs are now set to spend parliamentary time debating this from 3pm today, before giving it to the Lords. Mr Johnson remarked on Monday that such a step would ‘plainly chop the legs out from under the UK position’, undermining No. 10’s negotiating strategy in attempting to muscle the EU into a compromise on a deal.
328 to 301
The number of votes by which last night's motion was passed
Accordingly, and allegedly reluctantly, he will move to his Plan B and aim for the third general election in 4½ years. 
Under the 2011 Fixed-term Parliaments Act, the PM needs a vote in favour by two-thirds of all 650 MPs for the election to take place. This means that he requires support from a significant chunk of Labour MPs.
While Labour has not been clear over whether it would support this over the past 24 hours, its current thinking seems to be that it would only back such a motion once the bill gains Royal Assent after a successful passage in parliament.
This is partly because it fears that the government could take unusual moves to scupper the bill and then set the election date after 31 October. The broader timing of the passage of the bill is unclear. If passed it could become law on Friday. Under these circumstances the PM could opt not to pull the motion on an election this evening, but to wait until Monday and seek an election date of 15 October.
If this is the case, the date is unusual. 15 October is a Tuesday and this would be the first time that a General Election has taken place on a day other than Thursday since 1931 when the poll also fell on a Tuesday.
Interestingly then, the Tories won a landslide victory, taking over half of the popular vote! This would be timed just ahead of the EU Summit on 17/18 October. Mr Johnson might plan to gain a mandate for any deal which might have been agreed at negotiator level and (he hopes) use a healthy Commons majority to secure parliamentary approval and leave the EU with a deal.
The Conservatives risk seeing their vote split in key seats by the Brexit Party; the Lib Dems are polling close to 20% and may take a number of Tory seats in Southern England.
The Conservatives have enjoyed something of a ‘Boris bounce’ in the polls in recent weeks, now holding an average lead over Labour of close to 10%. On a uniform national swing from the 2017 election (when the Tories beat Labour by 2½%), this would deliver a large majority in excess of 100.
However the Conservatives risk seeing their vote split in key seats by the Brexit Party; the Lib Dems are polling close to 20% and may take a number of Tory seats in Southern England; and Ruth Davidson’s departure as Scottish Conservative leader puts a number of the party’s 13 seats north of the border at risk. And of course, as Theresa May discovered, the Conservatives’ ratings in the polls could fall.
Note as well that the 21 Tory rebels (which include two former Chancellors and the grandson of Sir Winston Churchill) had the party whip withdrawn and have been told that they will not be able to fight the next election as Conservatives. Also Phillip Lee yesterday defected from the Conservatives to sit with the Lib Dems.
Technically this means that, even with DUP support, the Tories are a minority government, 43 MPs short of a majority. So although our inclination is that Mr Johnson might get some sort of majority if he still goes for an election, we would be far from confident. Of course, it is not impossible that the result brings us back to a hung parliament. 
Sterling has made some gains over the past day, now standing at $1.2150, as markets judge that the prospect of a no-deal Brexit in 57 days’ time has receded. The situation now is very fluid, but overall our baseline case is that there will still be some sort of Conservative government in power over the next few months.
If this turns out to be the case, fears of leaving the EU without an agreement are unlikely to disappear. Accordingly we continue to expect sterling to trade on the downside over the next month or so and for now we are standing by our Q3 sterling target of $1.18 and our call that the risk of a no deal Brexit is close to 40%.