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UK election creates ‘hung parliament’

UK election creates ‘hung parliament’

09-06-2017 | Insight

The Conservative party won but fell short of an overall majority.

  • Léon  Cornelissen
    Léon
    Cornelissen
    Chief Economist
  • Lukas Daalder
    Lukas
    Daalder
    Chief Investment Officer

Speed read

  • Tories fail to bolster their majority of 10 in House of Commons
  • Pound falls almost 2% on fears of unstable coalition government
  • Main issue is Brexit will continue but talks now more difficult
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The snap election called by Prime Minister Theresa May had been intended to increase the Tories’ majority of 10 in the 650-seat House of Commons to give her a stronger hand in upcoming Brexit negotiations. Instead, the opposition Labour party had a resurgence from the prior 2015 poll and cut into their lead, winning an extra 29 seats. The pound dropped almost 2%.

“The narrative has been that May needed a landslide victory to create the maximum room for manoeuver to negotiate the Brexit, and that has dramatically failed,” says Chief Economist Léon Cornelissen. “During the campaign she was pushing for a hard Brexit, especially detailed plans on reining in immigration, and a lot of nonsense that no deal with the EU would be better than a bad deal, and clearly there is no mandate for it.”

“But this doesn’t make the Brexit negotiations any easier. With a hung parliament it’s difficult to see how they’ll be able to make an upfront deal on the up to GBP 100 billion of divorce payments that are being demanded by the EU. What’s most likely now is a coalition between the Conservative and the Ulster Unionists, but it would be an unworkable razor-thin majority. So a collapse of the government is likely, with perhaps new elections in October.”

UK economy is weakening

Cornelissen says the election outcome does not help a UK economy that is already struggling. “All of this has to be viewed in the background of a weakening economy – first-quarter GDP grew by only 0.2% against 0.6% for the EU,” he says. “UK inflation is on the rise, recently hitting 2.7% (above the Bank of England’s 2.0% target) and real wages are declining.”

“Of course, this result doesn’t bode well for investments, both foreign and domestic, in the UK because of the ongoing uncertainty, though the weakening of the pound will soften the blow somewhat. One reason why the UK economy continued to do well after the surprise Brexit referendum result was that a weak pound stimulates exports and economic growth.”

It wasn’t only a disaster for the Tories, who have ruled the UK since 2010. The Scottish National Party, which seeks a second referendum on an independent Scotland, lost 21 of its 56 seats, while the pro-Brexit United Kingdom Independence Party lost its sole seat. May became prime minister last year after David Cameron lost the Brexit referendum, in which 52% of Britons voted to leave the EU. After triggering the Article 50 exit clause in March, she called the snap election in April, fearing that her small majority would not last long enough to sit through the two years of divorce talks.

“Theresa May has to go, although the timing is uncertain, so there will be a leadership challenge within the Conservative party – and that could mean Foreign Secretary Boris Johnson becomes prime minister,” Cornelissen says. “The Scottish result however markedly diminishes the chance of a second Scottish referendum, so that would at least be a positive.”

Brexit the main market theme

Financial markets will take the whole thing in their stride, says Lukas Daalder, Chief Investment Officer of Robeco Investment Solutions. “At the end of the day, it doesn’t change much from the fact we’re still going to see a Brexit,” he says. “The tone of negotiations may change because of this result, but we still need to do the whole Brexit dance, and that continues to be the main theme in markets.”

“If you look at the outcome it appears that voters did not like the hard Brexit stance that May took, but much like with the poll, you get the answer to one question but not another – what the British people do want is still out in the open.”

“The pound dropped almost 2%, but after the initial Brexit vote last year, it collapsed by 12%, so this latest fall is relatively minor. The lower pound will help UK exporters, so the FTSE won't wobble by much, and I don’t expect European stocks to be much impacted. While this is a big issue of course for the UK, under the greater scheme of things, it’s not that shocking.”