May’s snap UK election shows that we ignore political risk at our peril
THERESA May’s decision to call a snap British general election and today’s first round of voting in the French presidential elections demonstrate the importance of political risk when assessing the prospects of the Irish and global economies. May managed to spring a complete surprise when she made her announcement.
By going to the country three years early, the British Prime Minister prevents the Brexit negotiations and the electoral timetable becoming hopelessly intertwined. It also helps that, with the main opposition Labour party trailing by 20pc in the opinion polls, May’s ruling Conservatives look set to greatly increase their parliamentary majority from just 17 to 100 or more seats.
The markets liked the news with sterling leaping in value by 2.5pc against the dollar and by 1.5pc against the euro in the expectation that an increased Conservative majority would result in a more orderly Brexit. Irish exporters to the UK will benefit from a weaker euro making their goods and services cheaper in sterling terms.
But is the optimism justified? Some of the early signs certainly point in that direction with the first post-dissolution opinion polls indicating that the Conservatives have widened their lead over Labour even further to 24pc. A similar margin of victory on June 8 would translate into about 400 seats for May, a parliamentary majority of about 150.
So, the Conservatives are on track for a thumping majority, May regains control of the Brexit agenda from her party’s Europhobes and the euro has fallen against sterling.
What could possibly now go wrong? Quite a lot actually. Despite the terrible opinion poll numbers, reports of Labour’s imminent demise are almost certainly over-stated. Most of its remaining support is geographically concentrated in the former industrial areas of the English midlands and north. This means that Labour will still win 160-180 seats no matter how bad the result.
Even if the Conservatives do end up doing very well against Labour, they in turn look set to lose seats to the Liberal Democrats. The Liberals lost 49 seats in the 2015 UK general election with over half, 26, of those lost seats going to the Conservatives.
With the Liberals having positioned themselves as the one unabashedly anti-Brexit party, they will be hoping to regain many of the seats which they lost two years ago.
Will Conservative gains against Labour be sufficient to offset losses to the Liberal Democrats? While the current opinion polls certainly indicate that they will, a lot can happen between now and polling day in six-and-a-half weeks time. Could we wake up on June 9 to a fatally-weakened May having won only 340-350 seats sandwiched between the Liberals and SNP with 50 seats each and a post-Corbynite Labour with close to 200? Far-fetched perhaps but not impossible.
Meanwhile French voters go to the polls today in the first round of presidential elections. Opinion polls show four candidates, Gaullist Francois Fillon, right-winger Marine Le Pen, former Socialist minister Emmanuel Macron and hard-leftist Jean Luc Melenchon, within a hairsbreadth of one another with Le Pen and Macron marginally ahead.
The long-standing expectation had been that Macron and Le Pen would fight it out in the second round in a fortnight, Macron winning handily. However, with the candidates so closely bunched together anything, perhaps even a Le Pen/Melenchon run-off, is now possible. A victory for either of these two candidates on May 7 could trigger an immediate existential Eurozone crisis.
We have already had some early warnings signs of what this might entail. When, in late February, opinion polls showed Le Pen strongly ahead in the first round the yield spread between French and German government bonds widened to over 80 basis points (0.8pc), its widest since 2012, points out AIB senior economist John Fahy.
All of which goes to show that we neglect political risk at our peril.
However, while political risk is certainly an important factor when seeking to predict economic outcomes, political events make themselves felt much more slowly than financial ones.
“Economists are chastened by the lack of short-term impact the Brexit vote has had on the UK economy,” says KBC Bank Ireland economist Austin Hughes. “Economists expect the impact of political events to be immediate when in reality it takes longer.”
We in Ireland saw this following the UK’s vote to leave the EU in last June’s referendum. All of the major economic forecasters including the Central Bank and the ESRI cut back their projected 2017 economic growth forecasts in the immediate aftermath of the referendum result only to execute an embarrassing U-turn and increase their forecasts once again when the anticipated slowdown failed to materialise.
“People have been pleasantly surprised, things haven’t been as apocalyptic as originally envisaged. The impact [of Brexit] has been more subtle. Where we have been looking for headlines we should have been looking for undercurrents,” says Hughes.