UK general elections: Driven by an implacable political logic domestically - Natixis

In view of René Defossez, Research Analyst at Natixis, Theresa May’s decision to call snap elections on 8 June makes plenty of sense strategically: the Conservative party has a very comfortable lead in the opinion polls and there is every likelihood it will increase its current 17-seat majority in Parliament.

Key Quotes

“The UK’s economic situation remains very favourable: the unemployment rate is only 4.7%, and the IMF’s 2017 growth forecast for the country has just come in for a sharp upward revision to 2%. Finally, there is the fact that, after June’s vote, the next general elections will therefore be in 2022, not 2020, for which the main drawback was its close proximity to Brexit (March 2019). Assuming that, as looks very likely, the Conservative party wins the upcoming elections, Theresa May will be able to negotiate more serenely with the UK’s European partners. The main enemies from within will be inside the Conservative party (namely the hard Brexiters) but, for Theresa May, the legitimacy conferred by these snap elections will help her asset her authority.” 

“The question that must be asked, therefore, is just what type of divorce is the Prime Minister seeking? The answer is to be found in the White Paper: the Prime Minister wants to retain free access to the European markets, while controlling immigration from the European Union and bringing to an end the jurisdiction of the Court of Justice of the European Union in the UK. It is clear not all three can be achieved concurrently. However, Theresa May still seems to believe that there can be “special relations” with the European Union after Brexit. In other words, she wants to negotiate a soft Brexit, i.e. a divorce that will be as painless as possible, notably through a transitional period extending beyond March 2019.”

“The market also seems to be buying into the idea Brexit could end up being rather “soft”. That is why, after the surprise announcement of these snap elections, sterling appreciated sharply. The cable has since recovered back above 1.28.”

“A further appreciation of sterling would be a major “game changer”. It cannot be ruled out the British currency will strengthen further, as a number of central bankers are arbitraging in favour of sterling-denominated assets, at the expense of those denominated in euro. Their view is that the EMU risk is greater than the UK risk. While the UK has to grapple with Brexit-related risks, the EMU faces an existential risk: the French elections are being fought by candidates, two of whom are staunch Eurosceptics and tally more than 40% of voting intentions. The political risk in Italy remains a serious issue, with M5S seemingly capitalising on the difficulties of the governing party.”

“Sterling could therefore extend its recovery, which would have positive as well as negative consequences. The main positive consequence is that this would moderate the upturn in inflation, hence lead to a less pronounced slowdown in real wage growth. Consumption would slow nonetheless, mainly because the expansion in consumer credit will peter out and that the households’ saving ratio now has scant downside. The two main negative consequences will be a lesser contribution by net exports to GDP growth, all other things being equal, and a still very substantial current account deficit.”

“Finally, whereas it seems that the UK will be angling for as soft a Brexit as possible, the position of the EU27 has not changed, Member States girding their loins for a hard Brexit, which will see the UK relegated to a banal third-party country, with no specific advantages. Brussels is already trying to fend away British companies from European projects (such as Galileo), which would be a major blow for British high-tech specialists. In other words, the markets are probably right to be arbitraging between UK and EU risks, but are probably not founded in their belief Brexit will be anything like what the British government is hoping.”