Back in February 1974, Conservative PM Ted Heath called an election on the question "Who governs?" Unfortunately for him, the electorate answered "Not you". Fast forward to 2017 and if PM Theresa May was asking a similar question when she went to the country seeking a stronger mandate for the Brexit negotiations, the answer at this stage is "Who knows?"
A day after general election 2017, and with a hung parliament now in place, the resulting questions are substantive ones and the answers are complex and multi-layered.
Who will govern? Far from securing her “strong and stable” mandate, Theresa May’s snap election has ended in a hung parliament - albeit with the Conservatives taking the largest number of seats. Given this result, the Conservatives’ intention is to form a minority government, most likely gaining support for their legislative programme (to be set out in the Queen’s Speech on 19th June) from Northern Ireland’s Democratic Unionist Party (DUP). But this situation will be neither comfortable nor necessarily long-lasting. Minority governments tend to have a short shelf life in the UK: back in 1974, the country had returned to the polls by October of the same year. Another general election in fairly short order is therefore a distinct possibility.
Who will be Prime Minister? Theresa May has quickly declared her intention to remain Prime Minister. But her presidential-style campaign, characterised by multiple and wide-ranging mis-steps, leaves her severely wounded. She is now more reliant than ever on her own MPs for support, as the Labour opposition calls for her resignation. Press reports are already suggesting that her colleagues are demanding concessions in return for their support - in particular, that she exercises less centralised control. Having surrendered her government’s majority – though increasing its vote share from 36% to 43% - her position surely remains tenuous. Boris Johnson is currently the bookmakers’ favourite to succeed her, should she resign.
What will the government’s policies be? The short answer is: whatever it thinks it can get through parliament in a Queen’s speech. But the long answer is more complex and troubling for the Conservative party. Its manifesto was notable by the absence of policy costings. Even so, the limits on its room for policy manoeuvre were illustrated by the “dementia tax” U-turn. Furthermore, Labour’s outperformance points to discontent in the country over the prospect of five more years of austerity. Given that the previous government (with a working majority of 17) had to reverse some of its tax plans to get its March 2017 Budget through, the new Chancellor is likely to face an even greater challenge.
What are the implications for the UK economy? A period of heightened domestic political uncertainty adds to concerns over the economy’s performance. We had already begun to see some weakness in the data in recent months, and this result potentially intensifies the downside risks to the near term economic outlook via sentiment and confidence. That said, just as markets have become used to political shocks and uncertainties over the past 12 months, UK firms and households have shown a remarkable degree of resilience, too. And Bank of England Governor Mark Carney has shown his willingness to maintain monetary policy accommodation in the face of such uncertainty.
What are the implications for Brexit? Article 50 has been triggered and the official talks with our EU partners are due to begin on 19th June. But the election result potentially throws a whole bag of spanners in the works, and there is a clear risk of delay to the start of negotiations.
Even if Theresa May were to begin talks on the planned timetable, her negotiating stance is now in disarray. On the one hand, a minority Conservative government is likely to be more vulnerable to parliamentary rebellion among its own hard-line, pro-Brexit MPs – potentially ‘hardening’ the final Brexit agreement. On the other hand, if the Conservatives’ relatively poor showing at the ballot box is interpreted as a rejection of Theresa May’s vision of a hard Brexit and strict migration controls, she may tack towards a softer Brexit. The DUP’s role in smoothing the government’s legislative path is crucial here. They are pro-Brexit, but because of the situation regarding the Irish border, they also favour a “comprehensive free trade and customs agreement” and “arrangements to facilitate ease of movement of people, goods and services”.
How the EU 27 respond to any such softening of stance remains to be seen. They might be willing to offer a more generous set of transitional arrangements in response to a more flexible UK approach – but at this very early stage in the proceedings, it’s all speculative.
What are the implications for a second Scottish independence referendum? The Scottish National Party remains the largest party in Scotland, but significant seat losses point to a substantially lower likelihood of a second independence referendum any time soon.
What are the market implications? Sterling was down by 1.4% against the US dollar in afternoon trading in Asia, on track for its biggest one-day drop since last October. At its worst overnight, the pound fell 2% to around an eight-week low. However, this was a muted response compared with the EU referendum: on 24th June 2016, sterling closed down 8.1% and by more than 11% at its low point on the day.
Modest short-term weakness in sterling is probably unsurprising, given the expectations running into the vote. However, the medium-term implications of the result are far from clear. So far, equity investors have taken a relatively sanguine view. The high weighting in the FTSE 100 of companies earning the majority of their profits from overseas continues to give some protection from domestic political or economic concerns. Gilt yields are virtually unchanged, suggesting bond investors are also fairly untroubled by the outcome so far. Global investors have had to get used to political uncertainty across global markets in recent years. With this experience in mind, investors are – at least for the moment – taking the UK general election result in their stride.