After Tory win, what now for the UK economy?

After Tory win, what now for the UK economy?

Britain's Prime Minister and leader of the Conservative Party, Boris Johnson speaks
Britain's Prime Minister and leader of the Conservative Party, Boris Johnson speaks during a campaign event to celebrate the result of the General Election, in central London, Dec 13, 2019. (Photo: AFP/Ben Stansall)

LONDON: The election triumph by Prime Minister Boris Johnson's Conservatives will likely bring on Brexit and a stimulus kick-start for the British economy after years of punishing austerity.

Below is an outline on what to expect following Thursday's (Dec 12) vote.

ECONOMIC GROWTH

Given the clear scale of the Conservative majority, Britain's exit from the European Union could finally be pushed through by the end of January.

Johnson says that will free up the new government to concentrate on trying to grow the stalled economy.

READ: UK destined for Brexit as Johnson wins big

Britain's economy avoided recession in the third quarter but there are increasing signs of slowing activity heading into the New Year, according to the latest data.

Gross domestic product rebounded by 0.3 per cent in the July-September period after a 0.2 per cent contraction in the second quarter, and growth stalled in October as manufacturing and construction slumped.

The Bank of England has upgraded its UK growth forecast to 1.4 per cent in 2019, but downgraded 2020 guidance to 1.2 per cent.

"It's a victory for relative stability on Brexit and the British economy," Jasper Lawler, head of research at London Capital Group, said in a research note.

"The size of the defeat felt by the Labour Party means the kind of radical changes they had in store for the economy are less likely to ever materialise," he wrote.

"That will be welcome news for investors who are waiting in the wings for some clarity from British politics about the direction it would take the economy."

COMMENTARY: Boris Johnson’s win and the shifting sands of politics in the UK

The Tories have overseen a decade of austerity while in government following the global financial crisis, but Johnson has promised to pump billions of pounds into public services.

At the same time, the Conservatives have said they do not plan to raise the three main taxes - income tax, sales tax and national insurance contributions for state benefits - questioning the party's commitment to fiscal responsibility.

And the outlook for Britain's economy will be determined also by external factors according to experts, especially the China-US trade dispute amid a global slowdown.

One issue of keen interest to foreign investors, who have ploughed into the British property market, is a Conservative vow to make foreign individuals and companies pay more tax on residential purchases.

REASSURANCES FOR BUSINESSES

British business on Friday urged Johnson to provide clarity and assurances on his Brexit deal, while stimulating the stalled UK economy.

"After three years of (political) gridlock, the prime minister has a clear mandate to govern," Carolyn Fairbairn, director general of the Confederation of British Industry (CBI), said in a statement.

"Businesses across the UK urge him to use it to rebuild confidence in our economy and break the cycle of uncertainty."

Fairbairn said "early reassurance on Brexit will be vital", noting that "firms will continue to do all they can to prepare for Brexit, but will want to know they won't face another 'no deal' cliff-edge next year".

Jonathan Geldart, director general of the Institute of Directors, said that British companies "are eager for some clarity now".

"For directors, 'Get Brexit done' will only have meaning once the details of our long-term future relationship with the EU are clear.

"The prime minister must resist the urge for arbitrary negotiating deadlines, and should commit to a proper adjustment period that starts when businesses know the full detail of what changes they may be facing."

POUND, EQUITIES

The scale of the Tory majority pushed the pound to a 18-month dollar peak and to highs against the euro not seen since the June 2016 Brexit referendum.

The London stock market's FTSE 100 index dipped initially at Friday's opening, hurt by the rallying pound's impact on major exporting companies, but was soon up again.

However, experts warned that the hard part is only just beginning in the Brexit talks with the EU, despite Johnson's insistence that a new trade deal can be agreed before a transition period ends in December 2020.

READ: Boris Johnson wins biggest Conservative majority in UK election since 1987

"It took Canada seven years to finalise a trade deal with the EU, so this looks like wishful thinking. Any delays could hit the value of the pound," said Hamish Muress, senior currency strategist at international payments company OFX.

The sterling currency is seen as a better indicator of Britain's economic health than the London stock market, which is loaded with multinationals earning in dollars.

A strong pound therefore tends to weigh on the FTSE 100.

But what about the outlook for index heavyweights such as banking giant HSBC, energy major Royal Dutch Shell and mobile phone group Vodafone?

Capital Economics analyst Hubert de Barochez said equities should recover from a prolonged period in the Brexit doldrums.

"That is because we think that the positive effects from reduced uncertainty surrounding Brexit and higher economic growth would outweigh the negative effects for UK multinationals from an even stronger sterling exchange rate," he said.

The broader FTSE 250 index, which is more weighted with domestic companies, surged in early trade Friday.

Source: AFP/zl

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