Boris Johnson’s massive victory leaves Brexit uncertainty hanging over U.K. economy

This post was originally published on this site

Markets and investors have two ways to look at the results of the U.K. general election that gave Prime Minister Boris Johnson’s Conservatives a commanding, near-40-seat majority in Parliament.

The first would be to salute the end of the hung Parliament that proved incapable of deciding on Brexit in the last year, and the resounding defeat of the Labour Party that campaigned on a radical platform of nationalizations, massive spending and higher taxes that seemed to scare voters as much as it did investors.

One major uncertainty has been lifted: Britain will indeed leave the European Union on January 31, after the new House of Commons approves the “withdrawal agreement” that Johnson concluded with the EU two months ago. Three and a half years after the U.K. voted to leave, Brexit will finally, to borrow from former prime minister Theresa May, “mean Brexit.”

The surge of the pound GBPUSD, +1.6712%  since Thursday night, and the jump of U.K. stock markets on Friday, with the FTSE 100 UKX, +1.90%  up 1.8%, show that, in the short term, markets seemed to focus on the end of a long-running U.K. political crisis.

But looking beyond January, what is also clear is that Johnson’s victory, as impressive as it may be, won’t change much about the U.K. prime minister’s predicament. He will now enter negotiations over the U.K.’s “future relationship” with the EU, namely the treaty that will govern trade and financial relations between the two sides. But his promise that he will never, ever ask for an extension of the 11-month transition period that will follow the U.K.’s departure early next year, and his proclaimed optimism that a treaty can be struck within that period, sound hollow.

Such treaties take years to negotiate, conclude and ratify. So either Johnson comes to terms with that reality, resigns himself to an extension and breaks his promise. Or he rushes into a limited treaty on the trade of goods to the detriment of the U.K. economy, which has a massive deficit in the trade of goods with the EU, while leaving aside the services industry — on which the UK has a sizable trade surplus. The third option would be the so-called “hard Brexit” that both sides insist they want to avoid.

For now, the only “extension” happening is that of the economic uncertainty created by Brexit. Investors will keep delaying their decisions pending the outcome of the U.K.-EU talks. Businesses will keep losing market shares abroad and, after a burst of euphoria, the pound could resume its slide, adding to inflationary pressures.

The only way out of uncertainty would be for Johnson to break his promises yet again, as he did when he agreed to leave Northern Ireland within the EU’s customs union for an indefinite period. He has the majority that gives him the freedom to do so. For now, it is unclear whether he wants to use it.

Add Comment