United Kingdom Politics July 2019

United Kingdom

United Kingdom: Boris Johnson set to become PM: What does this mean for Brexit and the British economy?

July 22, 2019

Boris Johnson is likely to become Conservative leader—and by extension prime minister—in the coming days. With the help of our panelists, we examine what this means for Brexit and the economy.


BREXIT


All options—deal, no deal and no Brexit—remain on the table. A general election, second referendum and further extension to the negotiating period—or various combinations of the three—are all significant possibilities. As expected, there is a notable divergence in panelists’ views.

Economists at UniCredit: “In our view, an extension of Article 50 is more likely than no-deal. A general election later this year seems inescapable and, while it may not actually change anything, it could open the door to another referendum.”

Adrian Paul, an economist at Goldman Sachs: “Boris Johnson may be unique in his ability to persuade his Eurosceptic colleagues that an imperfect exit deal is a price worth paying for a second stage of Brexit negotiations spearheaded by a bona fide Brexiteer who can also win the next general election […] we maintain the central view that a close variant of the current Brexit deal will eventually be ratified by a majority of MPs.”

James Smith, developed markets economist at ING: “A new eurosceptic UK prime minister will face stiff opposition from Parliament if they push for a 'no deal' Brexit. That might lead to another Article 50 extension if the new leader applies for more time to break the deadlock. But one way or another, the probability of a general election is rising.”

Andrew Goodwin, associate director at Oxford Economics: “Our forecast assumes that the new Prime Minister is forced to seek another extension to the Article 50 period. But with the EU only likely to be willing to offer one more extension, to March 2020, we assume that parliament eventually approves the Withdrawal Agreement as the ‘least bad’ option. This means that the UK formally leaves the EU in March 2020.”

Kallum Pickering, senior economist at Berenberg: “Two additional developments suggest that the hard Brexit risk has gone up. First, Johnson has picked eurosceptic Daniel Moylan as his top Brexit advisor. […]. Second, with Labour sliding in the polls […] up to 10 MPs in Brexit constituencies are ready to back a hard Brexit […]. We raise the risk of an eventual hard Brexit to 40%”.

George Buckley, an economist at Nomura: “we have raised our risks for a hard Brexit. However, such an outcome (no deal) would need to circumvent the will of parliament […]. We continue to forecast the agreement of a transition period this year to a free trade deal.”

Azad Zangana, senior European economist and strategist at Schroders: “the reality is that there is not enough time to re-negotiate the current Withdrawal Agreement. Promises to “do or die” lack credibility. A delay seems inevitable.”


FISCAL POLICY

During the campaign, Boris Johnson has suggested he would take a laxer fiscal stance than his predecessors, given promises to lower taxes, boost education spending and accelerate the rollout of high-speed broadband. This could make it harder to meet the current fiscal mandate, which aims to keep the structural budget deficit below 2% of GDP in 2020–21, as well as the government’s aim of eliminating the overall deficit by the middle of the next decade.

Azad Zangana, senior European economist and strategist at Schroders: “The next prime minister is almost certain to loosen fiscal policy after years of austerity. Public spending as a share of GDP is at its lowest level since fiscal year 2003/04. Meanwhile, tax receipts are at their highest level since 1985/86. Tax cuts and some increase in spending are likely, but both will take time to have any meaningful impact on the economy.”

James Knightley, chief international economist at ING: “With Philip Hammond likely to be out of his job […], his fiscal rule will be quietly dropped. Government borrowing looks set to climb”.

MONETARY POLICY

In the near-term, Boris Johnson likely taking over the helm makes the outcome of Brexit even more uncertain, which should reaffirm the Bank of England’s wait-and-see approach. However, a rate cut is not yet on the cards. If Brexit were to be resolved satisfactorily, the looser fiscal stance proposed by Johnson could encourage the BoE to raise rates faster than would otherwise have been the case.

Andrew Goodwin, associate director at Oxford Economics: “UK rate cuts will only become a possibility in the event that activity materially undershoots the MPC’s forecast, inflation expectations fall back or the UK leaves the EU in disorderly fashion.”


EXCHANGE RATE

The pound has had a torrid run in recent weeks, depreciating against the USD and EUR amid rising Brexit concerns, which are likely to remain acute in coming months.

Petr Krpata, chief EMEA FX and IR strategist at ING: “the likely confirmation of Boris Johnson as the next Conservative leader and thus prime minister next Tuesday won’t be helpful for GBP. The Conservative party conference in late September will also add pressure to GBP, with peak pressure building in October ahead of the 31 October Article 50 extension deadline.”

Kathrin Goretzki, FX strategist at UniCredit: “Given his promise to deliver Brexit by 31 October, strictly ruling out a further delay to the deadline, the risk premium on GBP is likely to remain elevated.”




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