Issue of the week: the election, the pound and Brexit
Markets are still factoring in a Tory victory, but the pound has become the political barometer of continued Brexit uncertainty
“Until last week, markets were not expecting the UK election to offer any twists, let alone a shock redolent of last summer’s Brexit vote,” said Michael Mackenzie in the FT. Hence the “swoon in the pound” after a Yougov poll raised the possibility of a hung parliament. Markets take the view that a strong mandate is needed to negotiate Brexit – and that a less clear-cut victory for the Tories “only compounds the uncertainty over how the UK will leave the EU as the clock ticks down to March 2019”. When the Tories were riding high in the polls last month, the pound rose above $1.30. Last week it briefly slipped below $1.28 – and some in the City reckon it could slump below $1.20 if Labour wins an outright majority, or forms a coalition with the SNP. But even a Tory victory could lead to sterling weakness – if the “legacy” of this election is that Theresa May emerges as a “weaker leader”.
Markets aren’t always averse to hung parliaments, said David Smith in The Sunday Times. Neither a minority government nor a moderate coalition is an automatic negative for the pound. But in the past, there wasn’t the “additional huge complication of Brexit”. This election is just “the latest hurdle” for the economy and business to negotiate following a “rollercoaster ride” over the past year. One measure of confidence, the Lloyds Bank Business Barometer, “showed confidence slumping last summer, then embarking on a jagged recovery, before slumping again last month”. Since “election uncertainty” is likely to “give way to new uncertainties”, there’s no sign of a let-up. Two things worry business. First, the impact of a significant cut in immigration. Secondly, the PM’S “no deal is better than a bad deal” rhetoric. According to the Centre for Economic Performance, leaving the EU without a deal would result in a 40% drop in exports to the EU over ten years, and a 3% fall in GDP per capita.
Whatever the election result, Brexit negotiations are likely to mean “a partial reprise of the 1970s”, said The Economist. “Politics will be paralysed – this time by negotiating Brexit rather than fights with unions. The economy will stagnate thanks to a mixture of uncertainty and business flight.” And the “roiling discontent that produced Brexit will find new targets”. In the 1970s, Britain “edged its way” forwards by adopting the “neo-liberal” economic consensus – privatisation, deregulation, tax cuts and globalisation – that both main parties now appear to have rejected. Addressing the problems that “neo-liberalism allowed to fester”, such as rising inequality and social disintegration, is a worthy aim. But it’s no quick economic fix.