Strategy & economics

UK election: what a hung parliament means for the economy

Following the surprise UK general election result, we consider the implications for the economy and markets.

09/06/2017

Caspar Rock

Caspar Rock

Chief Investment Officer

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

Schroders

The UK general election has resulted in a hung parliament, with no party commanding an overall majority. The Conservatives have emerged as the largest party and will likely seek to form a minority government.

The result is unexpected. Polls during the election campaign had generally pointed towards a comfortable Conservative majority. We asked our panel of investment experts for their initial reaction to the election result.

Economics view: 

Caspar Rock, Chief Investment Officer, said:

"You may have read that sterling has plunged overnight – in reality, it was a less headline grabbing fall of approximately 2% against the US dollar. Perhaps it is more important to note that the currency is higher than it was on the day before the Prime Minister announced the general election just after Easter."

"Given the Conservatives did not succeed in winning an overall majority, the two parties from Northern Ireland suddenly become much more important – Sinn Fein who won seven seats but are not taking them up, and more importantly Arlene Foster’s Democratic Unionist Party who won 10 seats and are the only real option for a coalition partner. The DUP will have the opportunity to extract regional favours and have an influence on Brexit negotiations."

"Now we have the election out of the way, eyes will turn back to the state of the economy, where although no trend has been confirmed, recent indicators are weaker than they were at the end of last year. Declining consumer and business confidence, and a squeeze on real (inflation-adjusted) wages, may foreshadow a slowdown in the economy in the second half of the year, unless business investment picks up sharply. It is, however, not inconceivable that seasonal factors may be interfering with the data but we are watching it closely."

Azad Zangana, Senior European Economist & Strategist at Schroders, said:

“This is a disastrous result for the Conservative party, which must raise questions over the future of Theresa May as prime minister.

"As the largest party following the election, the Conservatives are likely to remain in power as a minority government, relying on the confidence and supply of votes from friendly opposition members of parliament.

"This suggests a less stable government, one that will have to make concessions and seek a consensus even when introducing simple changes to legislation."

What it means for the economy

“For the economy, households and corporates will be concerned by the increased political uncertainty,” Zangana said.

“However, at the same time, the paralysis in Westminster will mean fewer changes to fiscal and economic policy. Despite this, we expect a pull back in household spending and business investment which will exacerbate the slowdown currently being experienced."

The effect on the pound and BoE policy

“The fall in the pound has been smaller than expected given the hung parliament. At the margin, lower sterling will push up inflation a little further than previously forecast, which will have a small negative effect on household spending.

“The Bank of England (BoE) is unlikely to change its policy in the near-term but it will offer reassurance that it stands ready to act in the event of financial instability.

“Looking ahead, there is a high chance that any Conservative minority government may not last beyond a year. It will likely struggle to pass any finance bill.”

What about Brexit?

“As for Brexit, serious damage has been done to the UK’s negotiating position,” Zangana said.

“Without a strong mandate, Europe can ignore the UK’s demands. Even the UK’s threat to pull out of negotiations will now appear hollow and lacking the support of the British public.”

Author

Caspar Rock

Caspar Rock

Chief Investment Officer

Caspar Rock joined Cazenove Capital in September 2016 and is Chief Investment Officer. He joined from Architas Multi-Manager Ltd, a part of the AXA group, where he was Chief Investment Officer and responsible for all aspects of the investment activities, including investment philosophy, process and team. He also oversaw portfolio management at two of AXA group’s private banks. He previously headed up the multi-manager business at AXA Framlington from 2006 to 2008. Prior to that, he managed a range of directly invested equity and bond portfolios, and was Head of European Equities at Framlington as well as a member of the Healthcare team. He has 29 years’ investment experience. 

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

Schroders

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

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