Snapshot - Strategy & economics

May resignation raises UK recession risk

Our economics experts share their views as Boris Johnson, who could easily take the UK out of the EU without a deal, is installed as favourite to become the UK’s next prime minister.

24/05/2019

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

Schroders

Janet Mui

Janet Mui

Global Economist, Cazenove Capital

Schroders

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Azad Zangana, Senior European Economist and Strategist:

Prime Minister Theresa May has now announced her resignation, stepping down on 7 June. This will trigger a Conservative Party leadership contest, the winner of which would also become prime minister.

May’s resignation follows the end of Brexit talks with the opposition Labour Party, which officially concluded without agreement.

At this stage, bookmakers have the former foreign secretary and mayor of London Boris Johnson as favourite. The hard-line Brexiteer could easily take the UK out of the EU without a deal, despite parliament voting in favour of essentially removing the option. He could do this by simply failing to comply with the EU's demands that the UK should continue to follow the rules. This presumably would lead to the EU agreeing to terminate the relationship in October.

If this were to happen, we would anticipate the economy to slow and fall into recession around the turn of the year. While the Bank of England would probably cut interest rates eventually, the expected depreciation in the pound would cause inflation to spike. The household sector has already run down its safety buffer in the form of its savings rate, therefore a contraction in demand is very likely.

Janet Mui, Global Economist, Cazenove Capital - part of the Schroders group:

The mixture of the unwillingness of the EU to re-negotiate, the lack of appetite for hard-Brexit at the parliament and potentially toughened stance on Brexit by the new prime minister points towards further political turmoil. It is hard to see how a compromise across various stakeholders can be resolved before 31 October. Ultimately, a political process such as snap election or a second referendum may need to take place to find a way forward.

As a result of the additional Brexit uncertainty, we expect UK economic activity to face further headwinds. The recent intensification of political turmoil has caused a sell-off in sterling to a 4-month low versus the dollar.

At the time of writing, sterling has not reacted meaningfully after Theresa May’s resignation, hence it is a reflection that the news has been priced in. Going forward, sterling is likely to remain volatile and subject to downside risks in reaction to Brexit headlines.

 

This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. 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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