End of May at start of June

24 May 2019

George Brown

Investec UK economist

Prime Minister announces that she will step down from office and as leader of the Conservative Party on 7 June

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Nearly three years after her premiership began, Theresa May has announced that she will resign as UK Prime Minister on 7 June. She had previously pledged to step down once the Brexit deal she had struck with Brussels was passed and earlier this week unveiled the Withdrawal Agreement bill that she would bring before parliament.
 
But an outright rejection to this from her own MPs and likely abysmal performance in yesterday’s European Parliament elections have served to hasten her exit from Downing Street. 
 
In a statement delivered outside Number 10, the Prime Minister said that it was with “deep regret” that she had not been able to deliver Brexit. She went on to urge her successor to find a consensus in Parliament where she had not “that honours the result of the referendum”, quoting Sir Nicholas Winton in saying that “compromise is not a dirty word. Life depends on compromise”.
 
‘Compromise is not a dirty word. Life depends on compromise.’
She finished with an emotionally powerful conclusion, declaring that she departed with “no ill-will, but with enormous and enduring gratitude to have had the opportunity to serve the country I love”. 
 
The process for determining Mrs May’s successor will commence in the week following her departure, during which she will stay on as a caretaker Prime Minister. After leadership nominations close, Conservative Party convention dictates that ballots among MPs are held on Tuesdays and Thursdays.
 
In each round, the candidate with the fewest votes is eliminated until two remains. After holding hustings around the country, the two are selected by a postal vote by the party faithful. However, reports suggest that the Conservatives are keen to expedite this process in order to install a new leader before the House of Commons rises for the summer recess in July.
One advantage of this is that it would provide Mrs May’s successor more time to try to break the Brexit deadlock and lessen the likelihood of another extension to the UK’s current departure date of 31 October.
 
But given the complexities of the Brexit negotiations and the deep divisions in the House of Commons, we still judge that there is insufficient time to do so and therefore we still expect a six-month delay to end-April 2020.
 
For further details, see: Potholes in the (Belt and) Road?
 
In terms of who will succeed Mrs May, Former Foreign Secretary Boris Johnson is the clear favourite. Numerous surveys of the Tory membership base show he commands a strong lead over other potential frontrunners, while polling by POLITICO-Hanbury suggests that he is the only leading contender that would be able to pull voters back from the Brexit Party.
 
But we caution that it is too early to call the result of the leadership contest, with history showing that the Tory frontrunner does not always win. After the Prime Minister confirmed that she would step down in June, cable has rallied to $1.27.
 
This morning’s volatility likely reflects the uncertainty that investors are now presented with, by the leadership contest. Our own view is that recent political developments present downside risks to sterling. A new Tory leader could shift to a more hardline Brexit stance, in an effort to claw back Brexit Party votes. Hence, although not our baseline case, the risk of a ‘no-deal’ Brexit have risen.
 
There is also a greater possibility of a general election, which could see the installation of a Corbyn-led (or even Brexit Party participating) government.