Early British election can only be good for economy
Investors and businesses don’t like uncertainty. This is something investors and the British have lately taken in their stride. Last year’s referendum vote on Brexit have somehow proved that may be the British people have made the right choice. UK economic growth and economic fundamentals have improved further since last year.
Local and international investors have shown that there is great value in UK assets. The financial markets has withstood the storm and delivered good performance for those who have ignored the pessimists. It is sometimes worthwhile investing when it comes to strategic issues that could affect the future of any country. Here are talking about a great country with strong economic and political fundamentals. Added to the uncertainty of the Brexit negotiations is an early June election that the British Prime Minster just called for to get a clear mandate form the British people so she can negotiate the terms of the Brexit on their behalf and in favor of the British economy. The June general election vote is the fourth big vote in as many years which sounds, on the face of it, like a period of unprecedented political turmoil. Yet this time investors and the financial market seem not worried at all.
On the news of the upcoming general election, Sterling went up against most currencies. May be Sterling’s strength is to do with the upcoming presidential election in France than what might be the outcome of the British election in June. Again, it is a sign of investors’ confidence in the UK that they are bidding up the British Pound than holding on to the Euro. Part of this calm market reaction is undoubtedly is about the context of the Brexit negotiation. The upcoming Brexit negotiations are the big unknown hanging over the economy, and Theresa May the British Prime Minister’s hands will be much stronger if she gets a clear and strong mandate from the British voters. Obviously this depends how she will fair in the general election.
This June general election is probably going to be fairly certain and the outcome is quite clear compared with previous general elections. It is just a case of by what margin the Conservative government increases its majority rather than whether it is going to be a hung parliament. As the latest opinion polls show the sitting prime minster will win by a huge majority in the coming June election. If it does then it will allow Theresa May to have a stronger mandate, it will allow her to push ahead with the Brexit agenda a bit more easily. So, that might reduce a little bit of uncertainty over the next couple of years as there is more chance of that getting past unimpeded. Investors and businesses are too happy to see Theresa May at 10 downing street with a larger ruling majority and a clear mandate to negotiate on behalf the British people.
Add to that the timing of the next election, and forward-thinking economists can see a scenario in which this election adds to long-term certainty, rather than detracting from it. Without the snap election, the government faced a vote in 2020, which could have clashed with Brexit talks, assuming a transitional period takes the negotiations to beyond spring of 2019.
Having an election in 2022 would potentially be after the transitional period, when on the previous timetable an election in 2020 would potentially be smack bang at the end of the negotiations. But the apparent market positivity can also be attributed to an acceptance of uncertainty as markets and businesses become more used to elections, and understand how to face unpredictable events.
Looking back to June last year when the Brexit referendum took place and just after the Yes vote, most economists and forecasters anticipated a slump with the Treasury’s analysis warning of an immediate crash in Gross Domestic Product and analysts were predicting a rapid slowdown in economic activity. However, none of that happened. On the contrary economic growth instead accelerated. As the Prime Minister said when she announced the snap election: “Despite predictions of immediate financial and economic danger, since the referendum we have seen consumer confidence remain high, record numbers of jobs, and economic growth that has exceeded all expectations.” That indicates that the wider public is notably less worried about political uncertainty than economists previously thought.
The British consumers are getting a bit used to this now, all these referendums and elections that they have been going through, have encouraged consumer-focused businesses to invest in the past year. But there could still be a knock to the economy if the constant flow of major votes gives foreign investors the idea that Britain is part of a global picture of electoral turmoil.
That picture itself could harm investment prospects as companies fear an economic slowdown, but price inflation has risen since the selloff in Sterling of last year. Importantly for Britain’s international image is the performance of its neighbor. The French election could create more uncertainty than the British June election in particular for international investors. @Rasameel