UK election result eases Brexit uncertainty – for now

13 December 2019 | Markets and Economy

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By Dr. Peter Westaway, chief economist, Vanguard Europe

The Conservative party has won a significant majority in the UK general election, following one of the most unpredictable polls in recent times.

Boris Johnson's Conservatives are on course to win 365 seats1, exceeding pre-election polling estimates and giving the party a healthy majority of 80.

Sterling rallied sharply on the result, which reduces some of the short-term uncertainty that has dominated UK politics and the economy in recent months. The UK parliament should now be able to approve the Brexit withdrawal agreement relatively soon, although questions still remain over how long negotiations with the European Union (EU) over a future trade deal will take once the UK leaves on 31 January 2020.

Early approval of the withdrawal agreement would reduce uncertainty in the near term and provide a modest tailwind to growth. Economic activity would also be given a boost by expansionary fiscal policy. UK Chancellor Sajid Javid's new fiscal rules allow for an increase in capital spending of around 0.5%-1% of GDP, which we expect him to use.

However, we expect the external growth environment to remain soft, with subdued demand from the UK's major trading partners in Europe, Asia and North America. For 2020, we expect UK growth to remain close to trend at 1.2%, the unemployment rate to remain relatively stable at around 4% and wage pressures to be muted2. With inflation pressures contained, we expect the Bank of England to leave interest rates on hold throughout 2020.

Once the withdrawal agreement has been approved, the UK would then enter into a transition period, which is due to expire at the end of December 2020. During this period, we expect the government to try to negotiate a free trade agreement with the EU, although we anticipate that the negotiations are likely to take longer than a year. As a result, there is a strong likelihood that the transition period will need to be extended beyond 31 December 2020 in order to secure a deal that is agreeable to both the UK and the EU, despite the insistence by the Conservatives that they will not seek to do so.

Without a timely and comprehensive resolution to either the UK-EU or US-China trade negotiations, policy uncertainty is likely to continue to drag on global growth in 2020. We remain in an era of elevated uncertainty and the time-tested principles of portfolio construction are expected to hold, with high-quality bonds retaining their risk-reduction and diversification properties in portfolios. 

 

At the time of publication, one seat – St Ives – was still to declare and this was expected to vote Conservative.

Vanguard Investment Strategy Group forecasts as at November 2019.

 

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