Vive la Revolution
2017 is a critical year for European politics not to mention the triggering of Article 50 and Trump.
UK Prime Minister Theresa May startled UK markets this morning by calling a snap press conference at which she stated her intent to hold a General Election on 8 June. Despite much speculation to the contrary previously, the PM had repeatedly denied that the government intended to hold an early election.
In principle the Fixed-term Parliaments Act, makes it more difficult to stage a vote ahead of 7 May 2020, the date specified for the next election. This enables an unscheduled to poll to take place via two routes - i) parliamentary approval with a two thirds majority; or ii) the government loses a vote of no confidence (and parliament fails to confirm a government within two weeks). Although the government only has an effective overall majority of 17, Labour leader Jeremy Corbyn had said that he would welcome an early election, on the grounds that this would enable his party to get its message out to the electorate, a call he reiterated today. Moreover Liberal Democrat leader Tim Farron echoed this sentiment. Together these parties have over 85% of the seats in in parliament, well in excess of the necessary margin. The vote in the House will take place tomorrow. The PM’s confidence that the numbers ‘work’ looks well founded and so the vote in the House, which takes place tomorrow, seems a done deal.
In her press conference, the PM said that an election was necessary to prevent ‘political game-playing’ by opposition parties, which could disrupt the government’s Brexit preparations. She claimed that she had only come to this conclusion ‘recently and reluctantly’.
But of course a quick look at the opinion polls tells an obvious story. With Labour hamstrung by the unpopularity of Jeremy Corbyn, the Conservatives have enjoyed a huge lead for a while now, currently by a margin of close to 20% over Labour. On these ratings pollsters suggest that the Tories’ majority would rise to somewhere around 110. This would be their largest lead in the Commons since Margaret Thatcher won in 1983, in the aftermath of the Falklands War.
Such a result would give Mrs May a personal mandate to pursue Brexit (remember that David Cameron, not she, was elected PM in 2015). In a more practical context it would also give her a workable buffer within her own party to overcome rebels from the pro-EU and Eurosceptic wings of the Conservatives, on whose support she currently depends, given the parliamentary arithmetic.
A further advantage is that a victory would allow her to negotiate Britain’s EU departure without the threat of an imminent election taking place. The UK’s negotiating hand in the run up to Brexit in March 2019 could have been weakened by the need to reach a prompt settlement on individual issues with the European Council. Moreover the UK would in all likelihood still be in the thick of the ‘phased implementation’ stage of Brexit i.e. in the process of settling a number of details once a broad agreement had been struck. In short, Mrs May’s decision gives her more time and more space to operate, providing of course that the strategy pays off.
Has the economic outlook played a part in today’s decision? Short-term pointers indicate that economic growth is slowing, as consumer spending power is hit by higher import prices on the back of sterling’s fall over the past year or so. But this might not be long lasting and growth could well (and we think will) bounce back by 2020. It could be that the government fears that the economy might be in an uncertain space in the immediate aftermath of Brexit. Perhaps these lines of argument carried some weight. Overwhelmingly though it is the prospect of a large parliamentary majority that has been the main driver.
At first blush we are not tempted to change our economic or interest rate forecasts following today’s events. Furthermore a PM spokesman insisted that the timetable for Britain’s Brexit plans remained in place. Indeed UK markets’ take is that an early election will improve stability, a sentiment we feel is justified. After a nervous wobble while investors questioned the motive for the sudden press conference, sterling recovered to levels not seen since February - $1.2720 vs the USD and 84p vs the EUR. The rise in the pound dampened UK stock indices, which had already been under pressure earlier in the morning. 10y gilt yields and short-term interest rate markets were little changed.
Tuesday 18th April 2017