A hung parliament was the worst possible outcome for markets that can no longer factor in the political volatility undermining the British economy.
Moving quickly to agree on parliamentary support with the DUP is good news for market volatility. However, the British economy has a rocky road ahead.
Brexit and the collapse of confidence
Monday opened with an Institute of Directors poll that suggests business confidence is in tatters, with a 34% swing in confidence since May. And although no one wants a return to the polls, the political impasse is adding pressure to the economy. Companies fear the UK will no longer have a seemingly inexhaustible supply of cheap and highly skilled labour, but are also unclear on the terms of market access both to Europe and the rest of the world. Negotiating trade terms without political stability within a year appears to be a tall order.
A BDO accountant report suggests that the key UK service sector is decelerating while Visa says consumer spending is falling for the first time in four years, The Times report.
Ratings agency Moody’s said on Monday that there are increased fiscal risks in the UK’s economy, projecting that the electoral outcome will probably delay Brexit negotiations and undermine the effort to reign over the budget deficit over the next two years, the BBC reports.
Over the next period, markets will be trying to read whether the UK is moving away from the certainty of a hard Brexit, or leaving the Single Market and the Custom’s Union is inevitable. Meanwhile, the “no deal is better than a bad deal” hardline put forward by the British government is already costing in investment and business relocation.
By some estimates, the prospect of “no deal” could deliver a 9% GDP drop by 2030. Losing Euro clearing alone could lose the British economy 83,000 jobs and affect another 232,000, according to a study commissioned by the London Stock Exchange. Be that as it may, the Brexit Minister David Davis asserted on Monday that the UK will be leaving the Single Market, as this is the only way to control borders, laws, and money.
Monday has seen the Pound’s exchange rate stabilise against both the Euro and the Dollar. In the immediate aftermath of the elections on Friday, the Sterling lost 2,3% in Asian markets and 1,5% against the Euro. The pound’s depreciation is putting a squeeze on disposable income.
As inflation surges on basic goods, including food and energy, consumers are feeling a sharp drop in purchasing power. That has a detrimental effect on income, in a country that has seen the slowest income growth in Europe besides Greece between 2007 and 2015.
The loss of purchasing power has caught up with growth. In 2016, the UK’s economy surged by 1,8%, that is, the highest among the G7 countries. But, on the eve of the elections on Wednesday, Eurostat revealed that the UK is the slowest growing economy in Europe.
With 0,2% growth in the first quarter, it is clear that the British economy has stepped on a major break from the 0,7% growth in the last quarter of 2016. Germany, France, Italy and even Greece are now growing at a faster pace. The recent electorate result spells further doom and gloom scenarios for the British economy.
The recent electorate result spells further doom and gloom scenarios for the British economy. 0,2% is approximately half of what was originally projected and came amidst certainty of a strong Conservative government. The question is what happens with surging inflationary pressure, a demand for an end to austerity politics, and the political capital of Theresa May all-but exhausted; in the words of former Chancellor, George Osborne, Mrs. May is a dead woman walking.