UK Election-2019 Outcome

The 2019 UK general election has delivered a substantial and larger-than-expected Conservative majority, fundamentally reshaping the UK’s political and economic landscape. With 649 out of 650 constituencies declared, the Conservative Party is projected to secure 364 seats, giving Prime Minister Boris Johnson a formal majority of 78 and a de facto working majority of 85, accounting for Sinn Fein's abstention.

Implications for Brexit

The decisive Conservative victory paves the way for a clearer path forward on Brexit. The significant majority reduces the influence of the hardline European Research Group (ERG) and increases the likelihood of a softer Brexit or greater flexibility on extending the transition period if necessary.

The Withdrawal Agreement Bill is expected to be reintroduced to Parliament next week, aiming for ratification before the Christmas recess. This timeline positions Brexit to occur formally by the current deadline of January 31, 2020, with Betfair implying a 93% probability of this outcome. Attention will then shift to the more challenging negotiations for a future UK-EU trade deal.

In the near term, UK assets and the pound are poised to benefit from this newfound certainty. Early 2020 could see continued positive momentum as markets anticipate a reduction in political risk.

Economic Projections

• UK GDP: Growth is forecasted at 1.3% in 2020, driven by increased government spending offsetting weaker private sector investment and softer household demand. Risks to growth remain modestly skewed to the upside.

• Monetary Policy: The Bank of England (BoE) is expected to cut rates by 25 basis points in May 2020, with a possibility of another cut in Q3. However, an earlier rate cut at the BoE’s January meeting appears less likely, with market pricing at only a 25% probability.

• Inflation: CPI is projected to remain below the BoE's 2% target, averaging 1.5% in 2020 and 1.4% in 2021, with sterling’s post-election appreciation contributing additional downward pressure. RPI inflation is forecast to average 2.3% in 2020.

Fiscal Policy and Gilt Issuance

A significant fiscal stimulus is expected in 2020, equating to roughly 0.75% of GDP. This will combine with a cyclical deterioration to push the PSNB deficit to 3.1% of GDP for FY 2020-21. Gross gilt issuance is forecasted to surge to approximately £165 billion in the same fiscal year, reflecting both policy measures and economic adjustments.

Scottish Independence and Political Risk

The Scottish National Party (SNP) is poised to gain 13 additional Westminster seats, bringing its total to 48 out of 59. This strengthens the party’s position ahead of the 2021 Scottish Parliament elections, where an SNP majority could intensify demands for a second independence referendum. While the Conservative government may resist such calls, Brexit's constitutional changes could make these pressures harder to ignore.

Labor Party and Broader Political Trends

Labor's historic defeat raises questions about the future direction of the party and its leadership. Jeremy Corbyn is likely to resign, but the extent to which the loss reflects his leadership, party policies, or the unique circumstances of this election remains uncertain. It would be premature to assume a shift toward greater political consensus in the UK.

Currency and Market Implications

The election outcome supports a more optimistic outlook for sterling. The pound is forecasted to rally to $1.35 against the dollar, with potential further upside into 2020. EUR/GBP could also strengthen to 0.82. These movements reflect reduced political uncertainty and expectations of improved relative growth prospects for the UK and Europe.

A softer Brexit scenario, now more probable, would likely support sterling’s long-term equilibrium exchange rate. Additionally, the market's overly pessimistic view on European politics and growth may start to shift, providing broader support for European currencies against the dollar.

Final Thoughts

While the Conservative victory does not eliminate all uncertainty, it significantly reduces political risk and establishes a functioning government with a clear mandate. This positions the UK for a more constructive approach to managing Brexit and its economic aftermath.

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