#UKvotes: UK economic scenarios post-election

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#UKvotes: UK economic scenarios post-election

Thursday, December 12, 2019

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LONDON, United Kingdom (AFP)— Britain's election result is set to significantly impact the direction of the nation's economy and financial markets whatever the outcome.

Below is an outline on what to expect following Thursday's vote.

Economic growth

If as pre-election polls have indicated and Prime Minister Boris Johnson's Conservative party wins a clear majority, then Brexit could finally be pushed through by early 2020, freeing the new government to concentrate on trying to grow the country's stalled economy.

Britain's economy avoided recession in the third quarter but there are increasing signs of slowing activity heading into the new year, according to the latest official data.

The Bank of England recently upgraded its UK growth forecast to 1.4 per cent in 2019 but downgraded 2020 guidance to 1.2 per cent.

The Tories have overseen a decade of austerity while in government following the global financial crisis, but Johnson is now promising to pump billions of pounds into public services.

However at the same time, the Conservatives have said they do not plan to raise the three main taxes – income tax, sales tax and national insurance contributions to state benefits – questioning the party's commitment to fiscal responsibility.

The outlook for Britain's economy will be determined also by external factors according to experts, especially the China-US trade dispute amid a current global economic slowdown.

Pound, equities

Financial analysts said a Tory majority would be the most beneficial outcome for the pound, which has rallied this week – reaching a 10-month dollar high – on expectations that Johnson will still be prime minister come Friday.

"A Conservative victory is likely to strengthen the pound considerably, as Brexit uncertainty would disappear provided that Boris Johnson gets enough of a majority to see his (EU departure) deal through parliament," said Hamish Muress, senior currency strategist at international payments company OFX.

"That said, one potential difficulty for the pound is Johnson's insistence that he can do a trade deal with the European Union before the transition period ends in December 2020.

"It took Canada seven years to finalise a trade deal with the EU, so this looks like wishful thinking. Any delays could hit the value of the pound," Muress added.

Britain's currency is seen as a better indicator of the UK's economic health than the London stock market which is loaded with multinationals earning in dollars.

A strong pound therefore tends to weigh on London's benchmark FTSE 100 index.

But what about the outlook for the FTSE 100 featuring companies ranging from banking giant HSBC to energy major Royal Dutch Shell and mobile phone group Vodafone?

"We doubt that UK equities would continue to underperform in the event of a Conservative majority at the general election," said Capital Economics analyst Hubert de Barochez.

"That is because we think that the positive effects from reduced uncertainty surrounding Brexit and higher economic growth would outweigh the negative effects for UK multinationals from an even stronger sterling exchange rate," he added.

More economic uncertainty

The second most likely outcome in Thursday's election, according to the latest polling, is a hung parliament whereby the Tories win the most seats – but not enough for an absolute majority. It would therefore have to rely on the support of small opposition parties to get Johnson's Brexit deal over the line.

A hung parliament could however result in the main opposition Labour party regaining power by forming its own coalition, most likely with the Scottish National Party.

Labour, led by Jeremy Corbyn, is promising an end to austerity thanks to huge investments in public services, notably the National Health Service and education.

As well as relying on tax receipts, Labour and the Tories would also borrow vast sums of money, taking advantage of low international interest rates. The Bank of England's main lending rate stands at 0.75 per cent.

Labour has also pledged a massive renationalisation programme should it win power – notably by placing the rail, energy and postal sectors back into public hands.

A hung parliament and/or a Labour government would create more economic uncertainty for Britain, according to analysts.

City Index analyst Fiona Cincotta said that a small Labour majority "is the least market friendly outcome given market concerns over Labour's nationalisation and fiscal policies, in addition to further Brexit uncertainty".

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